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It’s Time to Ditch the Double Tax

Taxing corporate income is counterproductive — more states should learn from Texas and Nevada

The Tax Foundation’s latest look at corporate income taxes offers an opportunity to survey the American Southwest’s competitiveness on what might be the dumbest levy state governments impose.

First, the numbers. The good news is that Texas and Nevada dispense with the tax entirely. (Although both states, unwisely, impose taxes on gross receipts.) With none of the four exceeding a top rate of 5 percent, Arizona, Utah, Colorado, and Oklahoma aren’t excessive, but there’s room for improvement.

You know where this is going. New Mexico imposes a top rate of 5.9 percent, while California’s burden of 8.84 percent is one of the highest in the nation.

Why is taxing corporate income such lousy policy? The Independent Institute’s Sheldon Richman probably put it best: “A corporation is not an entity. It’s a relationship among large numbers of people. If you tax ‘it’ you are really taxing those people.” The revenue governments reap from the tax could have been used in any number of productive ways, from raising workers’ wages to bringing on new hires, increasing spending on R&D to launching new products or services.

In addition, taxing corporate income is double taxation. First, profits are hit by the levy, but when those profits are then distributed to shareholders (many of them, directly or indirectly, retirees), they are taxed via the personal income tax.

Political gamesmanship often occurs with corporate income taxes, as elected officials pursue “economic development” through unequal treatment. For example, the Arizona Department of Revenue estimates that in the 2019 fiscal year, $141 million in revenue was lost to the state due to companies taking advantage of “exemptions, exclusions, deductions, subtractions, credits, or preferential rates.” No business should be condemned for using every legal mechanism available to reduce the annual check it writes to government, of course, but coziness and corruption are common when politicians pick winners and losers through the tax code.

Finally, according to the Cato Institute’s Chris Edwards, states’ corporate income taxes “might be the most inefficient taxes in the nation because they create large burdens on businesses but raise little revenue.” As the chart below shows, even in California, the levy accounts for a mere 3.43 percent of all expenditures.

Source: U.S. Census Bureau, 2019 Annual Surveys of State and Local Government Finances

The bottom line? Texas and Nevada have it right — the corporate income tax is a loser, bigtime, and smart states don’t impose one. With Arizona, Utah, New Mexico, Oklahoma, and Colorado enjoying budget surpluses, it’s time for their lawmakers to explore the wisdom of eliminating the levy entirely.

By D. Dowd Muska

Dowd brings nearly 30 years of research and writing experience to the Institute. A veteran of several think tanks, he is an expert on government at the municipal, county, state, and federal levels.

Raised on an apple orchard in the Connecticut River Valley, D. Dowd Muska is a researcher, writer, editor, and commentator. His focus is the nexus of fiscal policy, economic development, and technology.

Mr. Muska is the author of numerous policy studies, and his writing has appeared in newspapers throughout the nation, including the Las Vegas Review-Journal, The Detroit News, the Orlando Sentinel, the Cape Cod Times, the Santa Fe New Mexican, the Hartford Courant, the Waco Tribune-Herald, the Albuquerque Journal, the New Haven Register, and The Oklahoman. A graduate of The George Washington University, he lives in the Albuquerque metro area, but has started (very) early planning for a relocation to the Sierra Blanca in Lincoln County, New Mexico. He recently launched the Substack platform No Dowd About It.

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