This post was updated to reflect the most recent data available.
Tax policy may not be as exciting as discussing Golden Globe winners, but few topics rise to the level of its importance. Taxes directly impact your quality of life. The more the government collects from you, the fewer dollars you have to provide for yourself and your family.
The same principle applies to businesses. When government finances its profligate spending through excessive corporate taxes, entrepreneurs have fewer dollars to re-invest in those businesses. Less investment results in reduced job and wage growth.
The commonsense notion that higher taxes stunt economic growth is not without evidence. A Mercatus study determined higher taxes lead to a decline in gross state product (GSP), per-capita income, and the number of new businesses. Our own analysis (page 23) found better job growth in states with the lowest tax burdens when compared to states with the highest tax burdens.
As we’ve persistently pointed out, Pennsylvania is among the states with the highest tax burdens. Luckily, relief may be on the way. Senator Michelle Brooks and Representative Seth Grove will be sponsoring bills to cut the state’s corporate tax rate, which is the 2nd highest in the U.S.
Last year, my colleague Elizabeth Stelle wrote about cutting the corporate tax rate by ending special subsidies. This idea is just as relevant in 2015. According to the most recent numbers, if lawmakers eliminated nearly $700 million in special subsidies (indentified below), the corporate tax rate could be lowered to 7.2 percent from 9.99 percent.
|Corporate Welfare Grant & Loan Programs||2014-15 Budget (Thousands)|
|General and Special Funds|
|Agricultural Promotion, Education and Exports||$250|
|Ben Franklin Tech Development Authority Transfer||$14,500|
|Commonwealth Financing Authority Transfer||$77,755|
|Council on the Arts||$898|
|Discovered in PA Developed in PA||$5,000|
|Food Marketing Research||$494|
|Grants to the Arts||$8,590|
|Hardwoods Research and Promotion||$350|
|Infrastructure and Facilities Improvement Grants||$19,000|
|Marketing to Attract Business||$2,008|
|Marketing to Attract Tourists||$7,264|
|Municipalities Financial Recovery Revolving Fund Transfer||$4,000|
|New Choices/New Options||$500|
|Open Dairy Show||$177|
|Partnerships for Regional Economic Performance||$11,880|
|Pennsylvania Race Horse Development Fund||$250,118|
|World Trade PA||$5,824|
|Film Tax Credit||$60,000|
|Job Creation Tax Credit||$10,100|
|Research and Development Tax Credit||$55,000|
|Keystone Opportunity Zone||$87,500|
|Keystone Innovation Zone||$25,000|
|Resource Enhancement and Protection Tax Credit||$10,000|
|Alternative Energy Production Tax Credit||$10,000|
This 27 percent decrease in the corporate tax rate would rank Pennsylvania 22nd among the fifty states—a vast improvement over our current position.
What’s more, these calculations are based on a purely static model. Given that businesses respond to lower taxes, a lower tax rate could result in more robust economic growth, creating an increase in state revenue and allowing the rate to be cut even further.
Historically, Pennsylvania’s economy is slow to grow. A cut in the corporate tax rate may be just the jolt it needs to pick up steam.