Penny foolish, pound foolish
Iowa’s GOP is redefining counterproductive legislation.
Gov. Terry Branstad’s unabashed advocacy on behalf of corporations is now being exhibited in the Iowa Legislature, where lawmakers will soon discuss the governor’s proposal to cut corporate income-tax rates in half and slash property-tax rates for new construction.
This drastic decrease in corporate income- and property-tax levels is inexcusable in Iowa’s current budget situation. Cuts in business taxes of the size the governor is proposing would force a huge loss in revenue that would severely harm the state in the long run.
Helping to stimulate Iowa’s economy should certainly be a top priority of the state government, but a severe reduction in business taxes would have very little positive effect on the business environment.
Businesses take into account many more factors than the corporate-tax structure, as Neil Harl, a professor emeritus of economics at Iowa State University, told me. Harl explained that states should avoid having too high of a corporate income tax, but tax levels are not pertinent enough for an excessively low tax to have many positive benefits.
More important than tax structure is the livability of the state for a corporation’s employees. Corporations look for states that have strong education and health-care systems, cultural opportunities, and a reasonable cost of living. All of these categories make Iowa a good environment for businesses — not the tax structure, which is near the middle of the pack compared with corporate income-tax levels in other states.
If Iowa’s corporate income tax were cut in half, as the governor is proposing, the state would lose a substantial amount of revenue. In 2009 and 2010, Iowa received $457 million from corporate income taxes. Under the government’s current fiscal climate, implementing a tax policy that cuts that figure in half is irresponsible.
In the long run, the decreases in services resulting from the tax cuts will harm Iowa far more than any tax break helps. Forbes magazine chose Des Moines as the No. 1 place in America for business and careers in 2010, citing an educated workforce and low startup costs, among other factors. Losing the revenue generated by corporate taxes will force the government make even more cuts in such areas as education. Diminished quality of public universities and elementary and secondary schools will cause Iowa to lose the educated work force that makes it conducive to business now, while startup costs will be far lower than are necessary to encourage business growth.
In addition, cutting the corporate income tax rate by that amount does not provide an influx of dollars to Iowa’s economy. All of the costs associated with starting a business and inputs are already deductible in Iowa, so the only place the tax decrease creates more money is in final revenue. “The people who will benefit from these tax cuts are the shareholders, many of whom are not even in this state,” Harl said.
If Branstad wants to improve Iowa’s business environment, he should focus on funding initiatives and services that make Iowa livable for employees, including a new aspect of livability that is becoming ever more important: treatment of lesbian, gay, bisexual, and transgender individuals.
According to Harl, many employers looking to expand their business are concerned about the state of marriage equality and rights for gay people. The *Varnum v. Brien* decision made Iowa a leader in this category, but Branstad and his fellow party members in the Legislature are doing everything they can to weaken that decision.
Eventually, the tax cuts proposed by Iowa’s GOP would diminish the quality of life in Iowa enough to cause the very problem that Branstad is so concerned about preventing: corporate disdain and (possibly worse) corporate flight. Even with low taxes, businesses will not want to locate in a state that can’t provide a high quality of life for their employees.
Instead of focusing on corporate tax breaks, Iowa should invest in civil rights and public goods.
They’re far more profitable in the long run.
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