Cronyism

Kati Siconolfi Testimony on Maryland Tax Reform

On February 5, 2014 Kati Siconolfi was invited to testify in front of the Maryland Senate Budget and Tax Committee. Her written testimony can be found below.

Mr. Chairman, and Members of the Committee, thank you for giving me the opportunity to provide non-partisan research and analysis on Senate Bill 366. As you know, Senate Bill 366 reduces Maryland’s corporate income tax rate from 8.25 percent to 7 percent.   By way of background, I serve as Legislative Manager for the American Legislative Exchange Council, the nation’s largest, non-partisan, individual membership organization of state legislators that share a common commitment to the principles of limited government, free markets, and federalism.

Mainstream economists, small businesses owners, and taxpayers across the country know that high taxes have an adverse impact on economic growth. The vast majority of academic studies demonstrate that taxes have correlations to growth, with taxes on individual and corporate income having the strongest correlations [1]. Rich States, Poor States ALEC-Laffer Economic Competitiveness Index outlines this relationship by ranking each state’s economic outlook using 15 equally weighed economic variables, including state and local corporate tax rates. Maryland’s top marginal corporate income tax rate ranks as 35th in the nation. Other states with the highest marginal corporate income tax rates include Delaware (47), Oregon (48), Pennsylvania (49), and New York (50).  In comparison, the states with the most competitive corporate tax rates nationally include Nevada, Wyoming, and South Dakota, all which do not levy a corporate income tax [2].

Corporate income tax reform can help Maryland compete for jobs, investments, and growth.  Over the last decade, the 8 states with the lowest corporate income tax rates (CIT) outperformed the 8 states with the highest corporate tax in gross state product growth, employment growth, population growth, and even revenue [3]. For example, the 8 states with the lowest CIT rates experienced nearly a 5 percent rate in job growth, while the 8 states with the higher CIT rates experienced a job growth rate of less than 1 percent.  Furthermore, the 8 states with the lowest CIT rates had a population growth rate of nearly 12 percent, while population growth in the 8 states with the highest CIT rates was about 6 percent [4]. Taxes matter, and people do vote with their feet to the states with the best opportunities for jobs and growth.

Not only do high taxes have an adverse impact on economic growth, but labor can bear a significant cost from corporate tax rates [5]. Businesses do not pay taxes—people do. While businesses collect and remit taxes, the economic burden of a tax is always borne by an individual at some level. A tax on businesses might be absorbed by consumers in the form of higher prices, or workers through lower wages. For example, according to a study from the Department of Treasury, a 1 percent increase in corporate tax rates is associated with almost a 1 percent drop in wages. Furthermore, the study also estimates at least 40 percent of the corporate income tax is passed on to workers in the form of lower wages [6]. While economists are still debating the precise cost that labor bears from corporate tax rates, it’s important to consider the impact of corporate tax rates on workers and consumers.

Today, Maryland has a great opportunity to become more competitive for jobs, innovation, and growth. Thank you for giving me the opportunity to provide my comments on Senate Bill 366. I look forward to answering any questions you may have.

Footnotes


[1]McBride, William. “What is Evidence on Taxes and Growth?” Tax  Foundation.  December 18, 2012. http://taxfoundation.org/article/what-evidence-taxes-and-growth

[2] Laffer, Arthur, Moore, Stephen, and Williams, Jonathan. Rich States, Poor States 6th Ed. American Legislative Exchange Council. 2013.

[3] Laffer, Arthur, Moore, Stephen, and Williams, Jonathan. Rich States, Poor States 5th Ed. American Legislative Exchange Council. 2012.

[4] Ibid

[5] Gentry, William. “A Review of the Evidence on the Incidence of the Corporate Income Tax.” Department of the Treasury. December 2007. http://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/ota101.pdf

[6] Ibid


In Depth: Cronyism

Cronyism in tax policy stifles innovation, hinders competition and introduces a deep temptation for corruption. The 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found that in the most recent year in which states published their respective tax expenditure …

+ Cronyism In Depth