Corporate Close-Up: State Tax Relief Arrives--Will it be Effective?

Several states have recently enacted legislation that will cut their corporate income tax rates. Proponents of these measures argue that tax relief is necessary to remain competitive with other states. But recent criticism aimed at Kansas about the revenue impact of tax cuts enacted in 2012 might serve as a cautionary tale for other jurisdictions that may be considering this option.

Rhode Island has seen its corporate income tax rate reduced from 9 to 7 percent. Governor Lincoln Chafee had proposed that the budget contain a provision to collect remote sales tax for online sales, similar to New York’s rule, to offset the loss of revenue, but the budget bill did not contain this provision.

In Indiana, Governor Mike Pence signed a package of tax cuts that will reduce their corporate income tax rate from 7.5 percent to 7 percent this year with similar decreases to continue long term until 2021, among other provisions that lower taxes.

Meanwhile, Maryland has approved bigger tax breaks for industrial properties in Southeast Baltimore. This comes on the heels of implementation of film production tax credits, as well as a decrease in the corporate income tax rate of 0.45 percent per year for each of the next five years. Additionally, Maryland raised tax credits for biotechnology and research and development, hoping to attract investors for fiscal year 2015.

Proponents of the new measures in these states argue that the decrease in rates and increase in credits will attract business to their states and spur economic growth. Editorials in the New York Timesand Kansas City Star suggest that cutting tax rates on the heels of a mild recovery has been a failure recently in Kansas, whose growth has not kept up with the rest of the nation and whose budget has fallen into a deficit, prompting Moody's to downgrade the state's debt.

They also argue that tax cuts are ineffective both in pushing economic growth and attracting business from other states, and that trying to poach businesses from nearby states will have no effect on overall national economic growth.

Whether these tax cuts and credits will spur job growth without reducing state government revenue without broadening the tax base remains to be seen.

By Alexander Dowd

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Will the recent criticism of the tax cuts enacted in Kansas have a chilling effect on similar measures being introduced in other states.

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