Posted on: January 24th, 2014
The conflicting tax policies that are being adopted in Blue and Red States across the country are providing economists, elected officials, and most importantly voters, with front row seats to a fascinating experiment. The outcomes of this experiment will give observers a multi-billion dollar answer to the question, “Which tax structures create sustainable economic growth for all, rather than support the special interests of the few?”
One thing we know for sure, people who have the capacity to move, will leave poor performing states with lackluster economies and move to states with vibrant and sustainable growth. They will head to states where they can find employment or more successfully grow their businesses, are able to keep more of their hard earned wages, and enjoy the enormous benefits of sustainable job growth and economic vitality.
One of the key states to keep an eye on is Indiana. Beginning with the days of former Indiana Governor Mitch Daniels, through current Governor Mike Pence, The Hoosier State’s pro-growth, free-market policies have significantly improved its business and employment climate. Just this week, a proposal by State Senator Brandt Hershman that would continue the gains made over the last decade, passed out of a Senate committee.
If signed into law, the state’s corporate income tax rate will drop from 7.5 percent to 4.9 percent over five years. It also would provide a $25,000 exemption in business personal property, which Governor Pence has suggested might be even better to phase-out all together.
These tax cuts, which benefit all businesses, would be paid for through the elimination of tax credits that benefit the few. This chart shows the Tax Foundation’s Tax Climate Rating for Indiana before the passage of the Hershman proposal (the 2014 column) and after (as indicated in the column on the right):
Indiana State Business Tax Climate Index Rankings Under Hershman’s Senate Bill
The negative impact of corporate taxes is clear. The cost is passed onto to consumers via increased prices for goods and services, to stockholders through lower dividends, and to employees in the form of lower wages. Conversely, lowering or eliminating business taxes leads to capital reinvestment in equipment, job creation, higher wages, and the kind of economic prosperity that workers, investors, and employers deserve. This chart, provided by the Tax Foundation, provides great insight into the benefit of lower corporate taxes. When combined with lower individual tax rates, the effect is even more impressive.
Setting the best state tax policy is going to take strong leadership, an adherence to principles, consistency in policy initiatives, and a solid sense of what will benefit all of a state’s constituencies. Political leaders across the country need to look no further than the state of Indiana for a practical guide to success.