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October 17, 2005

Study: Corporate taxes should be eliminated to retain competitiveness

States wishing to remain competitive for international investment in today’s business climate should reduce or eliminate corporate taxes entirely, according to a new study by the Tax Foundation.

The study, released in early October by the Tax Foundation, found that many state lawmakers are revamping corporate tax structures in order to make their tax systems “more competitive for jobs and investment in the international marketplace.”

This year alone many state lawmakers submitted proposals to reduce or simplify corporate tax structures, the study said. Lawmakers in Utah and Georgia introduced legislation that would eliminate or reduce state corporate taxes “altogether.”

“Lawmakers in other states, by contrast, have become alarmed over the perception that
state corporate tax revenues are declining,” the study said. "These states have taken aggressive steps to prevent any 'leakage' of tax revenues.”

The study also dismissed proposals that would make bordering states corporate tax systems match, or “harmonize.” The study said measures such as harmonization can have “a chilling effect on a state’s image as an attractive place to do business.”

“There are thus two groups of state lawmakers: one that sees the corporate income tax (or any direct tax on corporations) as an impediment to economic growth, and another that is struggling to retain corporate income tax revenues,” the study said.

“Forty-five states levy a tax on corporate income,” the study said. “Many states also impose other taxes on business activity, such as franchise taxes (measured by capital) and gross receipts levies (which generally tax all corporate revenue, regardless of profitability).”

The differences between corporate tax structures in states create “a compliance nightmare for the modern multistate corporation,” the study said.

“Because of the rapid growth in multistate business, it’s common for multiple states to tax the
income of a single corporation,” the study said. “Significant complexity is introduced when rules are developed to ensure that each state taxes only its fair share of corporate income.”

Another recent study found that multistate corporations can spend twice as much money complying with state tax laws as federal tax laws.

Tax complexity “requires businesses to spend money complying with tax laws that would be better spent investing in more jobs,” The Tax Foundation Study said.

States that try to alleviate tax complexity by simplifying the structure are going against the grain, the study said. Lawmakers in other states are willing to completely eliminate all corporate taxes in order to attract more jobs and investments.

“States may one day again view the corporate tax as an important component of state revenue, but for now those who are fighting to keep it are fighting a losing battle, not only against lawmaking trends but against economic reality itself,” the study said.