Tag: business taxes

Chesapeake Prosperity Sunk by Boat Tax

The reigning politicians in my home state of Maryland are somewhat boxed in by geography. Clearly they are smitten with high-tax policies: the Tax Foundation rates the state’s overall tax structure among the country’s most onerous, 42nd out of 50, and the trend lately has not been favorable, with lawmakers having raised taxes and fees 24 times in just the past couple of years, as the Maryland Public Policy Institute points out.

On the other hand, Maryland’s smallish size and attenuated shape poses a tricky problem: most of the state’s population lives just a short drive from other states, and choosing to shop or do business in one of those other states—maybe even switch one’s residence there—is far less disruptive than it is for most Californians. Virginia has lower gas and sales taxes, for example, while Delaware levies no sales tax at all. Politicos still hotly dispute how many high earners were driven away by a 2007-2010 special “millionaire’s tax,” but no one argues with a straight face that the number was zero. Business taxes in Maryland, as the Tax Foundation explains, are set up so as to fall relatively lightly on mature incumbent businesses and much more heavily on new startups; that probably does dissuade some established businesses from fleeing, but at the alarming cost of stifling the new kind.

Over the weekend the Capital Gazette of Annapolis ran a news story about how marinas and other shoreline businesses have been badly hit by Maryland’s decision to retain a stiff excise tax on boat ownership (five percent of value if kept in the state more than 90 days a year). Other big maritime Atlantic states such as Virginia, Delaware, and Florida all offer better deals. The results? Boat owners keep their vessels elsewhere, registrations have drooped, and docking, repair, supply, and restaurant businesses suffer, the Capital Gazette reports:

It’s hard to fathom Maryland, home to Annapolis, known as the “Sailing Capital of the World,” would be in the bottom half of the country in total sales for boats, engines, trailers and accessories.

Yet Maryland’s sales fell from $183 million in 2010 to $162 million in 2011, placing the state No. 26 in the nation. In 2008, that number was $248.5 million.

Even the revenue from the excise tax itself is way down, “from about $29.9 million to $15 million” since 2006, the newspaper adds.

It’s as if the lawmakers in Annapolis didn’t realize that boats are mobile. I wish someone could have explained that to them.

A Fiscal Royal Wedding

The British royal wedding was splendid, and the bride and groom were a great match. As a fiscal wonk, my idea of a royal match-up would be marrying corporate tax cuts and business subsidy cuts. The Obama administration is talking about corporate tax cuts and Republicans are talking about cuts to farm subsidies. Might they get together over a cup of tea and work out nuptials?

The global average corporate tax rate has fallen over the last decade from 32 to 25 percent (KPMG, page 79). We have been stuck with a highly damaging 40% federal-state rate. Canada is chopping its combined federal-provincial rate to 25 percent. The Conservative government just won a parliamentary majority, which promises even more pro-investment changes for our largest trading partner.

Consider a Japanese car company deciding where to build its next North American plant. Should it choose a place with a 25 percent tax and stable government finances, or a place with a 40 percent tax and soaring government debt threatening major tax hikes?

The American economy is sputtering, and today we learned that the unemployment rate is back up to 9 percent. If the Obama administration wants to get the economy booming before next year’s election, it should push for a cut in the federal corporate tax rate from 35 percent to 20 percent or lower. And it should put aside all this stuff about “closing corporate loopholes.” A lot of supposed corporate loopholes aren’t loopholes to begin with, and as soon as you start trying to cut the real loopholes, half the business community lines up against reform and nothing gets done. Furthermore, if we chopped the corporate rate, the economic distortions caused by loopholes would decline.

Anyway, the largest corporate “loopholes” are probably “homemade loopholes,” which start disappearing automatically if we cut the tax rate. With a high tax rate, corporations have fashioned all kinds of financial structures to avoid taxes. Corporate tax experts agree that the mobility of the corporate tax base is high and rising. If we sharply cut our corporate rate, reported income would increase substantially as multinationals shift their profits into the United States. (For more on this, see my book).

A corporate tax cut would spur capital investment and economic growth. In 2005, the Joint Committee on Taxation used two macro models to look at the effects of various fiscal reform packages. By far, the largest positive impacts on GDP came from matching a corporate tax rate cut with federal spending cuts. (See charts 1c and 1d). The JCT found that:

A decrease in the corporate income tax rate primarily affects the economy through increasing the after-tax rate of return on corporate capital, which provides incentives for increased investment in corporate capital. Over time, this increased investment results in more goods and services and higher total output. It also results in higher labor productivity, leading to increased wages and employment.

So, let’s get cracking on a corporate tax rate cut. Forget about the corporate loopholes, and instead match a rate cut with cuts to business subsidies, such as farm handouts.

Let’s also put aside the idea of tying corporate tax reform to individual tax reform, as Ways and Means chairman David Camp has suggested. That’s just a recipe for gridlock. Obama is offering up corporate tax reform — for the sake of jobs and the economy, Republicans should jump on that opportunity right away.