Institute Questions Job Benefits of Corporate Tax Breaks

A new study by the Beacon Hill Institute at Suffolk University in Boston calls into question one argument being made for preserving various tax breaks that Massachusetts corporations have won from state lawmakers over the years.  In its BHI FaxSheet, "Wishful Thinking about Corporate Tax Breaks,” the Institute shows that the R&D and investment tax credits and the single-sales-factor formula for apportioning corporate profits do not contribute to the preservation or creation of jobs in Massachusetts.

Rescinding all three tax breaks, the Institute finds, would yield $300 million in new revenue (see Table 1). The tax hike would inflict economic losses.  In particular, it would cause business investment to fall by $592 million, or by 1.23%. A fall in business investment hurts the economy by reducing labor productivity and therefore living standards.

Table 1.

Economic Effects of Tax-Hike Options

Option	Jobs	Investment ($millions)	Tax Revenues ($millions)
1.  Rescind Tax Breaks	+1,321	-592	+300
2.  Raise Income Tax	-8,505	-39	+327
3.  Raise Sales Tax	-3,094	-51	+319
4.  Raise Property Tax	+1,066	-529	+296

 

Rather than destroying jobs, however, the tax hike would lead to the creation of 1,321 new jobs, as firms expanded hiring to make up in part for the reduced investment.  This is in contrast to the effects on jobs of an equivalent increase in the income tax.  If the state attempted to raise a similar amount in revenue, it would, the Institute finds, have to raise the income tax from 5.3% to 5.5%.  The result would be the destruction of 8,505 jobs. "There are many good arguments to be made for holding down corporate taxes, principal among them the harm that such taxes do to business investment,” notes David G. Tuerck, Executive Director of the Institute.   “But if the goal is to preserve jobs, the state should rescind corporate tax breaks rather than raise the income tax in any effort to raise revenues.";  The BHI study examined two further options for raising $300 million in new revenue:  increasing the sales tax from 5% to 5.5% and raising property tax rates by 4.3%.  As Table 1 shows, the sales-tax option would lead to job and investment losses, while the property tax option would lead to investment losses and some job gains. 

Last year, four major business groups supported a successful drive to cancel a planned cut in the income tax from 5.3% to 5.0%.  Since last year, the state has lost about 32,000 jobs.  BHI estimates that the state could have trimmed this loss by about one-third had it permitted the income tax cut to proceed on schedule.  Ironically, some of the business groups behind last year’s tax changes now argue, in the name of job creation, for the preservation of corporate tax breaks that do nothing to preserve or create jobs.

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Posted 6-11-03

Formatting updated on 24-Feb-2005 10:56 AM -