For the first time in recent history, Utah state government expenditures will actually decrease when compared with the previous year. The current budget situation can be traced to two main causes: an economic slowdown, exacerbated by the Sept. 11 tragedy, and excessive state government growth during the 1990s.
To alleviate these budgetary problems as well as to increase public education spending as part of a long term funding plan, some policymakers are quietly suggesting a 20 percent increase in corporate income tax rates. These suggestions are not new, nor are they wise. When all the evidence is considered, the case against raising corporate income tax rates is undeniable.
The state's budget problems are mainly self-inflicted. During the 1990s, state government expenditure growth exceeded 25 percent, even after adjusting for inflation and population growth. This growth occurred at a time when demand for many government services decreased due to declining poverty, low unemployment and fewer state-funded welfare cases. The bottom line is simple: The state needs to decrease spending, not increase revenues.
Experience has shown that corporate taxes are the most volatile of all the state's major revenue sources. During the recession of the early 1990s, revenues from the corporate income tax plunged an annualized 10 percent over two years.
The projected shortfall for corporate income taxes in the current fiscal year is expected to be 30 percent. No other state revenue source has been as dramatically impacted by recessions as the corporate income tax.
During a recession, as the growing investor class has learned in the past two years, corporate profits plunge faster and deeper than almost any other significant economic measure. Therefore, increasing corporate tax rates is simply a way to increase dependence on a highly volatile and unpredictable revenue source.
Raising corporate taxes would reduce Utah's ability to attract high-paying jobs. In the past 10 years, job and wage growth has generally been highest in those states with lower corporate tax burdens.
Utah's corporate income tax burden places the state near the middle by national and regional standards. Increasing Utah's corporate tax burden simply makes Utah less competitive and is ultimately counterproductive since higher taxes will result in fewer and lower paying jobs that ultimately result in lower government revenues.
Taxing corporations is a popular way for elected officials to appeal to populist instincts by hiding the true cost of government. Ultimately, corporations do not pay taxes but simply pass these taxes on to their employees in the form of lower pay, to their shareholders in the form of reduced rates of return and to their customers in the form of higher prices.
Higher wages are found in the more profitable industries and companies, and increasing corporate taxes simply reduces these companies' profits, thus reducing wages these companies pay.
Finally, raising taxes of any kind only addresses the symptoms of government problems but does not address the causes. Public education serves as an illustrative example. Nationwide and in Utah, per pupil spending has increased at rates much higher than inflation, but systemwide improvements have been minimal. Instead of raising corporate taxes to increase education funding, the state should rely on tuition tax credits for private education.
A $2,500 tuition tax credit would add much needed competition to a system whose performance has not significantly improved over time despite large increases in funding. Tuition tax credits also save taxpayer funds by diverting to the private sector a portion of the anticipated growth at a lower cost than it would to educate these additional students in the public system.
Tough times require tough decisions. Experience in the United States and abroad provides conclusive evidence that tax cuts, not tax increases, lead to long term economic growth. Utahns should be leery of politicians, organizations and activists who agitate for higher taxes in order to soak big (or small) business.
Mike Jerman is vice president of the Utah Taxpayers Association.