When Indiana lawmakers voted this spring to reduce the corporate income tax rate, they were joining hundreds of other legislators across the nation considering tax cuts.
But history shows these tax cut splurges can cause significant problems for states when their economies go south, leaving policy makers to face much tougher decisions about increasing revenue or reducing services.
At least 30 state legislatures have considered or are considering tax bills this year; and most of them would reduce revenue, according to Stateline.org, a nonprofit website that tracks state policy. Only a few states are considering tax hikes.
The moves are the product, in part, of an improving economy that has reduced unemployment and bolstered state revenues — at least over the past few years. According to the U.S. Census Bureau, state revenues have grown for 16 straight quarters through the end of 2013.
But some of these tax cuts are also about competition. There is a war among states to offer corporations the cheapest environment in which they can do business.
It’s the new economic development model. Rather than offering an enormous package of incentives meant to lure a specific company that’s offering thousands of jobs, states are competing to be the place where every firm, large and small, wants to do business.
The goal is to bolster tax revenue by increasing the number of taxpayers. The idea has merit in theory. A broader, more diverse tax base is a stabilizing factor during a recession. But the race to lure business development is just that, a race. No state is standing still.
Gov. Mike Pence boasted that when Indiana’s new tax cut is fully implemented, the state will have the second-lowest corporate rate in the nation. But there’s little chance that actually will be true.
That’s because the move by Indiana to reduce its income tax on businesses will likely spur other states to do so. Already this spring, New York lawmakers have approved a corporate tax cut, although its rate will not fall as far as Indiana’s. Wisconsin has passed corporate tax reforms, and other states are considering whether to make changes, as well.
And certainly, if Indiana is successful in attracting firms from other states over the next few years, those places are certain to react.
But there’s another problem with focusing on tax cuts. Reduced revenue puts funding for government services in jeopardy. And ironically, business leaders — the ones who are making the decisions about where to locate — care a lot about government services. Corporate execs don’t want to locate to areas without good schools, medical care and cultural amenities.
In fact, it’s big business that is clamoring for better mass transit in central Indiana. It’s the Indiana Chamber of Commerce fighting for pre-kindergarten programs that could eventually cost the state some $250 million annually. Business leaders are looking for a progressive approach to building culturally conscious communities that keep young college grads from escaping to the coasts.
But if Indiana policymakers look back at their own history, they’ll see that some of their past tax cutting sprees left them vulnerable. When Democratic Gov. Evan Bayh left office in 1997, the state boasted a huge budget surplus, much bigger than today’s when considered as a percentage of total spending.
But lawmakers frittered much of it away with a series of tax cuts meant to give some kind of reduction to almost everyone in the state. They realized later that the benefits were spread so widely that no one person noticed that big of a break. And when the next recession came along, the state was unprepared to weather it without cuts to schools and state services.
The situation was so serious in 2005 that when then-Republican Gov. Mitch Daniels took office, he proposed a temporary tax increase, one that lawmakers rejected. Eventually, Daniels and lawmakers brought the state’s finances under control — just in time for another recession, the largest since the Great Depression.
We’re now just a few years removed from that financial debacle, and lawmakers in Indiana and other states appear to have caught the tax cut fever again. They should consider history before they get carried away.
Lesley Weidenbener is executive editor of TheStatehouseFile.com, a news website powered by Franklin College journalism students.