Tuesday, February 08, 2011

Should Indiana Be Cutting Its Corporate Income Tax 40% Now?

A wise old friend of mine during my days working for the Illinois legislature used to always quip that nobody was safe as long as the Circus was in town. When the legislators would finally adjourn for the year, he would say the people of Illinois were now safe until whatever date they were scheduled to return for the next session. His observation is equally applicable to the Indiana legislature. While the social agenda over at the Indiana State House appears to be on full wacky overdrive, we shouldn't ignore the tinkering lawmakers are considering on the tax front. I'm talking about the 40% corporate income tax cut being proposed, a move that would save the corporations that pay the tax about $140 million a year.

Senate Republicans are proposing to roll back the corporate income tax rate from 8.5% to 5%. Lawmakers complain that Indiana's tax rate is among the highest in the country. While the rate may indeed be high, corporations aren't paying much under the tax by the time they take advantage of all of the credits and tax breaks Indiana generously awards them. Indiana derives only 5% of its state tax revenues from the corporate income tax. Over the past 10 years, corporations have paid dramatically fewer taxes to the state. Ten years ago, corporations were paying just under $1 billion annually, which at that time represented more than 10% of the state's annual revenues. Last year, corporations paid only $592 million in taxes to the state. Gaming sources kicked in a greater share at $680 million.

Indiana has increasingly shifted its tax burden from businesses to individuals over the past decade. During the last decade, sales taxes grew by nearly two-thirds, thanks in part to a 2% rate increase in the sales tax rate over the past decade from 5% to 7% after two separate tax increases. Sales taxes now represent 47% of state revenues, while the individual income tax comes in second with a 34% share of state revenues. Many small business owners pay the individual income tax as opposed to the corporate income tax since they typically organize as a pass-through business entity, such as a subchapter S corporation or LLC. Indiana's individual income tax rate of 3.4% is actually among the highest in the country when local income taxes are added into the mix. Individuals who smoke paid triple the amount in cigarette taxes thanks to a hefty increase in that tax during this period. Indiana also hits up individual estates for inheritance taxes for about $135 million a year. Many small estates exempted from the federal inheritance tax are subject to the state's inheritance tax since it taxes estates over $100,000 and up to a rate as high as 10%.

It seems to me a decision to cut the corporate income tax rate without significant tax reform is a mistake. Indiana has made some very short-sighted decisions with taxes in recent history to help businesses. For example, Indiana lawmakers earlier in the last decade approved a rate cut for the unemployment tax to help businesses at the same time it increased benefits to unemployed workers. As a consequence, the large reserve Indiana's unemployment fund had built up gradually dissipated until it became one of the first funds in the country to go broke when the recession took hold. Indiana is now more than $2 billion in debt to the federal government. Lawmakers are now having to consider an increase in the tax to craft a plan for paying back that debt over the next 10 years. Indiana has generously awarded EDGE income tax credits in recent years to lure new businesses to Indiana at the same time it is handing out to many of those same businesses large property tax abatements that tend to shift the tax burden to individuals and other business owners. Indiana's research and development tax credit gives huge tax breaks to companies like Eli Lilly. I suspect people would be astounded if they saw how little some very large companies like Eli Lilly pay the state in corporate income taxes.

I'm also confused by the seemingly conflicting messages being sent by this tax cut move. On the one hand, the Daniels administration is boasting about how many businesses it has been successful at luring to Indiana because of our supposedly lower cost of doing business at the same time they are arguing the state is losing businesses because our corporate income tax rate is too high. Can someone help me out here?


Bradley said...

It does not make sense to me, but not much of his administration has. You mention my biggest pet peeve with Daniels' administration -- Indiana's bungling of unemployment the last 6 years.

As long as the morons currently running DWD ("The Reign of Error" as a friend calls it) are still in place the next 2 years, the debt to the federal government will mightily struggle to get back to $0 -- no matter what the General Assembly's current plan to fix it is. Seriously -- Indiana overpaid claimants $1.157 BILLION from '06-'09 (over half the debt to the Feds and more than EVERY state but CA and IL), and no one gives a damn? DWD was responsible for $859 MILLION of that amount, and no one gives a damn? The GA could lower UI benefits to $100 maximum and decrease the share of businesses a few thousand dollars, but as long as the Daniels' DWD keeps screwing-up, everyone will continue to pay.

Also, how can this state be so business-friendly when we became the second state during this recession where our employers have to pay an increase of $21 per employee in federal UI taxes (because we were the second state to have a bankrupt UI Trust Fund, with an increase each year for years to come)? How can we be so business-friendly a state when we will owe the federal government between $80 and $100 MILLION in interest payments this year (and more to come for years) for the federal government bailing-out our UI?

Maybe I'm missing something. When Daniels came into office in 2005, there was still over $150 MILLION in the UI Trust Fund. Now, Indiana owes $2.1 BILLION for a bail-out. The recession did not cause all that money to disappear.

Meantime, corporations will be given a break while the small businesses are especially socked with unemployment taxes and losses of money because DWD has been run by idiot business people and failed lawyers the last six years (large corporations can survive those blows more easily). The rich get richer in this state. When will people here demand a stop to this crap?

dcrutch said...

"It seems to me a decision to cut the corporate income tax rate without significant tax reform is a mistake."

You nailed it. Reformation with an emphasis on simplicity and greater participation would increase trust in government and "everyone pulls the wagon", respectively. But, in Indiana & particularly Federally with the last "Bush" rates extension, aren't we now at a stopping place on rates and ready to tackle reform?

"Cutting" business regulation in support of an economy that provides both jobs and government tax revenue- I can't disagree with.

Cato said...

Good post, Gary.

"Indiana has increasingly shifted its tax burden from businesses to individuals over the past decade."

That, right there, is the essence of the manner of leftist party the current Republicans have become.

Both business costs and government services costs are socialized under Republicans. It's actually a substantial bit more unjust and crushing than the manner of collectivism the Democrats employ.

Remember that a person is the indispensable actor in any moral code. In the absence of government, all property is held by persons. A person preexists the government, while governments and corporations are merely legal fictions. In exchange for the benefits of a corporate charter, corporations can be widely told what to do, as corporations are not repositories of a priori rights.

In theory, as governments nominally help all men, all men can be compelled to support the government. By contrast, it is positively unjust to force any individual to pay the costs for a group of individuals' corporate undertaking for which the benefits are privately held.

The Republicans, however, view corporations as necessary state functions that help all residents, thus being able to make demands on all citizens for support. That's collectivism of the Mussolini sort.

Excepting government, it's an utter inversion of the proper moral order to have an individual pay the costs of other mens' fictions.

Unknown said...

Corporations pay no taxes anyway..those taxes are ultimately paid by the consumer through higher prices to recoup the cost of taxes.

Pete Boggs said...

We need elimination and / or dramatic reduction of many programs & taxes.

Capital goes or is invested where it's welcome & remains where it's well treated. Review apportionment trends. Estonia has more truly progressive tax policy than we do (US).

Taxes are sticks & subsidies are sticks or at best carrot sticks- we need far less of both.

There's reportedly THREE TRILLION DOLLARS nationwide, of ponzi schemed, unfunded municipal pension liability. Brace yourselves folks, there's a wall coming...

Sean Shepard said...

Several thoughts...

(1) Corporations/Companies don't pay taxes - their customers do when they buy the product. The tax burden is embedded in the cot of the product. So, when you buy Milk you're paying the grocery store, the transportation company, the farmer's, etc... taxes. Ronald Reagan once quipped in the 70s that taxes doubled the cost of a loaf of bread.

(2) In lieu of massive reform, tax reduction is good wherever you can get it so long as the taxes on others, who do not directly use a specific government service such tax pays for, are not increased. (reducing a broad income tax to put in place a more specific use fee, for example, is sometimes better).

(3) Ideally, we'd be moving completely away from income taxes and to a more broad based consumption tax. After which, effort should be put into reducing the rate of the consumption tax to get it as close to zero as possible.