States’ balanced-budget requirements mean that they will have to pay for this loss of tax revenue by raising taxes elsewhere or reducing services. But if states have to cut way back in the number of teachers or cops on the beat or do without needed maintenance for roads and bridges, they’ll become less competitive. Businesses aren’t attracted to states that lack services that they value, from good schools to well-maintained infrastructure.
Businesses won’t hire new employees unless there is greater consumer demand for their goods and services. Tax cuts for businesses won’t stimulate that demand.
State and local business taxes constitute less than 2 percent of a firm’s costs, on average. Trying to encourage employers to hire more workers by trimming this already-small cost further is akin to trying to wag a large dog by a very short tail.
Many tax cuts are pure windfalls that reward businesses for doing what they would have done anyway. That’s especially true for across-the-board cuts in business taxes. But it’s also true for more narrowly tailored tax breaks that attempt to require a specific action, such as hiring more workers, because there is no practical way to prevent businesses from claiming the tax break if they would have made those hires anyway.
States’ concerns that not cutting business taxes will place them at a competitive disadvantage vis-à-vis tax-cutting states are misplaced. As Delaware Governor Jack Markellrecently wrote after visiting hundreds of businesses: “The number of business leaders who asked me to lower their taxes can be counted on one hand. . . . What I hear most from business leaders is that they want the government to continue to improve our schools, reduce the time it takes to issue permits and licenses, enhance our transportation infrastructure, protect our arts community, strengthen linkages between our institutions of higher education and local companies. . . . We’ve never succeeded as a country by racing to the bottom…. Now’s not the time to start.”