Behind the decline in the corporate income tax as a share of total tax revenues lies the growing proliferation of corporate tax exemptions, credits, deferral of payments, and various other ‘loopholes’. This is the explanation of why the effective corporate tax rate has consistently declined while the official rate has not. This trend of declining effective rate is occurring at the state level as well as the US federal level.
While the official state corporate tax rates range from 5% to 10%, states in aggregate are averaging only about 2% effectively in corporate tax payments. States across the US have been in a ‘race to the bottom’ to grant more and more corporate tax loopholes and exceptions in order to lure corporations from other states to their state.
A recent New York Times survey showed that states are not only lowering their corporate tax rate to lure corporate headquarters and operations, but are granting corporations cash, free use of public buildings, exemption from property taxes, and diverse other ‘awards’ in a desperate attempt to bring jobs to their states from other states. The New York Times article estimated the cost in state corporate tax revenues at around $80 billion a year. In many cases the corporations take advantage of the ‘awards’ and then create few jobs or cease operations afterward anyways.
The $80 billion a year average since 2009 amounts to more than $300 billion in reduced state corporate tax revenues. That has occurred despite a cumulative budget deficit total among all 50 states of $581 billion during 2008-2012. In a sense then, more than half of the states’ budget deficits during the past four years may be attributable to corporate tax breaks, resulting in only 2% collected of the official 5%-10% state corporate tax. But instead of targeting a restoration of corporate taxation, most of the states have targeted reducing public workers’ pensions, benefits, and wages as the solution to their budget deficits.
Among the most egregious states lowering corporate tax revenues are Texas, which provides $18 billion a year in such concessions. Oklahoma and West Virginia have granted corporate tax concessions equivalent to one-third of their annual state budgets.
The industries and corporations that are the main beneficiaries of this ‘race to the bottom’ trend in state corporate taxation are oil & gas companies, film & entertainment, technology companies, and auto companies—the latter of which pioneered the trend back in the 1980s. Since 1985, auto companies have received $13.9 billion in state corporate income tax concessions. More than 267 auto plants have been shutdown in the US nonetheless.
The trend toward declining state income taxation continues to accelerate. A number of states have, and are proposing, to eliminate corporate income taxation altogether. Most recently, Louisiana, Kansas and Nebraska. The inter-state US corporate income tax ‘race to the bottom’ thus continues.
Solutions to the Corporate Tax ‘Race to the Bottom’
Solutions to the ‘Great Corporate Tax Shift’ are not economic rocket science. To address the ways in which US corporations today avoid paying taxes—state to state, country to country, and US federal—the following short list of measures should be legislated.
The State-to-State Corporate Tax ‘Race to the Bottom’
To avoid the state-state ‘race to the bottom’, an ‘Interstate Corporate Equalization Tax’ should be implemented. Corporations that move their (taxable) headquarters from one state to another should be required to pay the ‘losing’ state a fee equal to the difference in the two states’ corporate income tax for a period of three years into a special fund. Corporate subsidies and other ‘awards’ should be included in the fee calculation. The ‘gaining’ state should be required to deposit as well an equivalent amount of the corporate fee into the fund. All the funds from the corporate fee and state equivalent contribution should be deposited in a special worker benefits fund, administered by the losing state, to be used solely for supplemental unemployment, job training, and job relocation expenses for those workers who lost their employment when the corporation moved to the lower tax paying (‘gaining’) state.
The Country-to-Country Corporate Tax ‘Race to the Bottom’
To avoid the growing country-by-country corporate tax ‘race to the bottom’ that is occurring globally as well, measures are necessary to discourage US corporations’ avoidance of US taxes as result of shifting investment and jobs offshore. All current, numerous tax incentives that the US federal government grants corporations today to invest and shift jobs offshore should be immediately repealed. For example, US corporations should be eligible for the current investment tax credit only after the corporation has proven it has invested in the US. No US investment…no tax credit. Furthermore, the investment tax credit should be conditioned upon proving that 50% of the credit has been spent on accompanying US job creation associated with the investment. No US job creation…no tax credit.
Enforce the collection of foreign profits tax at a US effective corporate rate of 35%, not the current 2.2% rate. Companies that refuse to comply and continue to hoard their cash offshore in subsidiaries should be slapped with a rising progressive tariff on the goods they produce offshore and import back to the US until the foreign profits tax is fully collected. If they don’t pay your foreign taxes, then they can’t import back and sell your foreign made goods in the US.
Subsidiaries of foreign corporations operating in the US, with origins in those countries that engage in egregious corporate tax avoidance assistance—e.g. Ireland, Netherlands, Bermuda, and others—should be required to pay a supplemental corporate tax to the US federal government. Similarly, foreign corporations of those countries exporting their goods to the US should be required to pay an additional tariff on sales to the US.
US Multinational Corporations that practice ‘intra-company pricing’ designed to minimize their US based taxable profits, and to divert those taxable profits to offshore subsidiaries for the purpose of avoiding US taxes, should be considered as engaging in financial fraud, and thus subject to prosecution by the US Securities & Exchange Commission and other relevant regulatory bodies.
Select Measures Further Restoring US Federal Corporate Taxation
In addition to ending the corporate tax ‘race to the bottom’, both between US states and between countries, a priority short list of additional changes to federal US corporate taxation are also necessary. These include:
Make the ‘effective rate’ the nominal top rate for corporations. Corporations should pay an effective top corporate tax rate of 35%, not the actual 12% they do today. That means ending all corporate tax loopholes across the board except those that result in annually confirmed and proven US job creation.
All corporate depreciation allowances should be rolled back to definitions and standards in effect in 1980. All research & development corporate tax credits should be allowed only for R&D work shown actually conducted in the US, not by foreign US corporate subsidiaries.
Not least, for both US financial corporations and for ‘portfolio’ financial investments by US non-financial corporations, a financial transactions tax should be introduced that taxes stock and bond sales at 0.1% per value of the purchase for all stock purchases of 100 share or more; 0.5% for purchases of 1000 shares or more; and 1% for all shares of 10,000 or more. For bonds, a financial tax of $100 per each $10,000 value for Investment Grade corporate bond purchases, and $200 per each $10,000 for High Yield (Junk) Grade corporate bond purchases. A 1% tax on all foreign exchange trading by corporations. And a 1% tax on all third party derivative trading by corporations.
Collectively, these various measures would raise approximately $1 trillion a year, every year, eliminating all US federal deficits, as well as deficits for most US states. Their secondary effects would include re-directing the decades-long outflow of US corporate investment abroad and creating millions of jobs again in the US.
Jack Rasmus is the author of the 2012 book, ‘Obama’s Economy: Recovery for the Few’, published by Pluto Press and Palgrave. He hosts the weekly radio show, Alternative Visions, on the Progressive Radio Network. His website and blog are: www.kyklosproductions.com and jackrasmus.com, and his twitter handle, @drjackrasmus.