When it comes to paying taxes, there are two villains: the 1-percenters, and businesses. Everyone is convinced that neither of these groups are paying their fair share. How else could they be so rich? After debunking the myth that the wealthy do not pay sufficient taxes in our February newsletter, your Utah Taxpayers Association now suggests a break for businesses by eliminating the state corporate tax.
Corporate income taxes do not generate much revenue for the state. The table below, taken from the Utah State Tax Commission’s Annual Report shows the revenue generated by this tax from 2018-2022. In 2022, the corporate tax rate was 4.85%, and only accounted for around 6% of revenues collected by the Tax Commission in FY2022, and 3.6% of the state’s total budget. In fact, this low revenue is an increase from historical norms; in 2020, corporate tax revenues accounted for just 1.9% of the total budget, and in 2019, just 3.1%.
Note that despite a decrease in the tax rate between 2021 and 2022 of ten basis points, corporate tax revenues actually increased, suggesting advantages to a lower rate, though this rise can be attributed to many factors.
The graph below shows how Utah’s tax system portfolio composition has changed over time. Corporate taxes, represented in orange, have represented a small and decreasing fraction of the state’s tax revenues. Since Utah consistently has a surplus, particularly in the last several years, eliminating this tax entirely would have minimal impact on state revenues, budget and spending. However, by attracting more businesses to the state, the tax base benefits from the massive additions to all the sales, property and personal income taxes that those jobs and businesses bring to Utah. Give back a little, and gain a ton.
Businesses Don’t Pay Taxes
Those who balk at the idea of eliminating the corporate income tax would do well to remember that businesses don’t pay taxes; people do. Any cost levied to a business is ultimately passed on to the consumer. The elimination of corporate income tax would therefore represent a tax cut to individuals. . Corporations might be less inclined to implement new cost hikes due to the elimination of this expense.
Corporate Tax Suppresses Entrepreneurship
In a 2018 report “Entrepreneurship and State Taxation”, Professor E. Mark Curtis from Wake Forest University, and Ryan A. Decker of the Federal Reserve reported their findings that “increases in corporate tax rates have a statistically and economically significant negative effect on employment among start-up firms. Specifically, for every one percentage point increase in the corporate tax rate, employment in start-up firms declines 3.7 percent”.
Over the last several years, Utah’s corporate tax rate has been shrinking alongside the individual income tax rate, and its economic outlook has thrived, as is demonstrated by the state’s #1 ALEC rating. The elimination of the corporate tax would allow business, and the income, jobs and economic growth that accompany business, to grow and thrive for the benefit of all Utahns. Other states have seen the wisdom in this and many are moving towards significantly lowering or eliminating their corporate income tax; Utah would do well to follow suit.
While taxing businesses may appear to be a pain-free method of generating revenue for the state, the truth is it is both harmful to businesses and taxpayers, and ineffectual. Revenues are low, entrepreneurship is suppressed, and ultimately individuals pay the tax in the form of higher prices. Far from being a “handout” to big business, the elimination of the corporate tax has the potential to benefit every resident of Utah.