State corporate tax hikes kill jobs and reduce income, according to a new study published by the National Bureau of Economic Research. However, corporate tax cuts do not spur income or employment gains unless the cuts occur during a recession.
A one percentage-point increase in the corporate tax rate reduces employment by as much as 0.5 percent. In a state such as California, a one percentage-point corporate tax hike could reduce employment by over 86,000 jobs.
Income from employment would drop by 0.3 percent to 0.6 percent in the event of a one percentage-point corporate tax hike. For a family earning $60,000 a year, this could result in $360 less per year, not accounting for inflation.
The negative impacts of corporate tax hikes apply whether the economy is booming or in a recession.
However, do not mistake this study as recommending immediate corporate tax cuts. Tax cuts are only effective for employment and income gains when the economy is in a recession. A corporate tax cut of one percentage point could increase employment by 0.6 percent in a recession. In California, this would amount to over 103,000 jobs created. A one percentage-point tax cut during a recession would increase income by about 1 percent. For a family earning $60,000 a year, this amounts to a $600 annual raise, before inflation.
The estimated effects of tax changes are “remarkably stable,” regardless of population density, income levels, or the prevalence of small businesses, the study says.
The study was conducted by Alexander Ljungqvist and Michael Smolyansky, both with New York University. They focused on state-level corporate income tax changes, and caution that their work should not be extrapolated to federal corporate taxes. Still, a cut in the federal corporate income tax rate may have benefits whether the economy is in a recession or not.
As the authors noted, state corporate income taxes change more often than federal corporate income tax rates. “We count 271 changes in state corporate income tax rates since 1969,” Ljungqvist and Smolyansky wrote.
The authors looked at corporate tax changes in a given state, and then compared the employment and income effects of the border counties on each side of the state line.
For example, if Florida changed its corporate income tax rates, the authors examined employment and income changes in all of Florida’s border counties, plus the Alabama and Georgia counties that border Florida’s state line.
At 12 percent, Iowa collects the highest top corporate income tax rate in the United States, according to the Tax Foundation. Six states collect no corporate income tax: Nevada, Ohio, South Dakota, Texas, Washington, and Wyoming. However, Ohio, Texas, and Washington collect a gross receipts tax.
