MEMO: Reduce Georgia Corporate Tax Rate to 5%

Grade (pre-presentation): 6781/90 = 7490%

MEMO: Reduce Georgia Corporate Tax Rate to 5%

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TO: Dr. Chris Clark

FROM:

DATE: April 2, 2009

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The state income tax on corporations should be reduced from the current 6% to 5%. This will have the effect of reducing the compliance and auditing burdens on both government and business, and will help alleviate the strain of double taxation placed on corporate income through such taxes. In addition, reducing rates by 1 percentage point would place Georgia in a more competitive position relative to surrounding states, attracting business investment and encourage encouraging growth.

OVERVIEW OF GEORGIA STATE CORPORATE TAX STRUCTURE

Currently, corporate income is taxed at a 6% flat rate of 6%. Many of the guidelines and definitions are adopted from the U.S. Internal Revenue Code. To be subject to the Georgia corporate income tax, a corporation must be, according to O.C.G.A. § 48-7-31, “owning property within this state, doing business within this state, or deriving income from sources within this state to the extent permitted by the United States Constitution.” Exemptions include insurance companies that pay state tax on premium income and those exempt from the federal taxation under 501(c ) of the Internal Revenue Code. Unlike in other states, banks and financial institutions are not subject to special (higher) rates, but pay 6% as well.

STATE CORPORATE INCOME TAXES CARRY HIGH COMPLIANCE COSTS AND DISTORT BEHAVIOR

According to a 2004 article in State Tax Notes, compliance costs for state corporate income taxes are double those for federal taxes. In addition, state corporate income taxes only raise one- fifth the revenue of federal corporate taxes (Edwards YEAR). For interstate corporations, compliance costs include tax planning for multiple jurisdictions, reflecting insufficient coordination between states (McLure YEAR). Furthermore, these taxes provide incentive for companies to structure operations in ways that reduce or avoid tax liability, including moving factors of production from high tax states to low (Fox YEAR). Most state corporate tax systems are calculated on a 3 factor apportionment basis with property, payroll, and sales. Research by Peter Mieszkowski and George Zodrow (YEAR) shows that this type of formula does more to raise commodity prices and hurt consumers than other types of taxes. Also, Mieszkowski and Zodrow show that such taxes carry national implications as well. Specifically, “one of the principle effects of a single state’s corporation tax is to decrease the after-tax rate of return to capital throughout the nation.”

REDUCING THE GA CORP. TAX RATE WOULD LIKELY INCREASE OVERALL REVENUE

Georgia state corporate taxes only account for 5.5% of total state tax revenue (FTA 2007). Reducing the rate to 5% would have the effect of not only increasing corporate tax revenue through increased capitalization[CFC1], but also increasing revenues from property, personal income, and sales taxes due to increased consumption and higher employment. In Georgia, sales, property, and personal income taxes combined make up over 90% of total revenue, thus the immediate short-run loss in revenue would be offset in the long run by the increased revenue from the aforementioned factors taxesin the long run. Three oOf the states bordering Georgia , (Alabama, North Carolina, and Tennessee) have rates above six percent, while South Carolina and Florida have rates between 5-6%. Based on this, lTherefore, lowering Georgia’s corporate tax rate may seem to promise little gainwould make us as attractive or more attractive than all border states. , but when compared nNationwide, five states have no corporate income tax, and six states have flat tax rates below 6%. Other states have a progressive corporate income tax, with rates above and below 6%. Clearly, Georgia needs a lower corporate tax rate to stay competitive. Reducing the Georgia tax rate would not only lead to greater capitalization[CFC2], but would also open the door for tax competition among states, leading to a more efficient outcome nationwide[CFC3]. (McLure 2008).

ARGUMENTS AGAINST REDUCING GA CORP. TAX RATE

- Reduced revenue over short run. While this may be true, the long term benefits of such a decrease would outweigh the immediate drop for the reasons explained above.

- Increased burden on individual. There is a common misconception within public policy circles that corporate taxes do not affect individuals. This is simply not the case. As Mieszkowski and Zodrow (YEAR) demonstrated, corporate taxes primarily affect mostly owners of capital and consumers. Individual taxpayers would see an immediate benefit for Reducing reducing them would see an immediate benefit for individual taxpayers in the short run, and government lost revenue compensation in the long run would be unnecessary for the reasons explained above[CFC4].

CONCLUSION

While it is true that decreasing GaGeorgia’s. corporate tax rates would mean a drop in revenue, the benefits of such action outweigh any loss sustained in the short run through increases in capitalization[CFC5], greater interstate tax competition[CFC6], higher rates of economic growth, and reduced compliance costs for companies and auditing costs for government.

Works Cited

Edwards, Chris. “State Corporate Income Taxes Should Be Repealed.” State Tax Notes 32.964 (June 2004). http://www.lexisnexis.com.proxygsu-geo1.galileo.usg.edu/us/lnacademic/results/docview/docview.do?docLinkInd=true&risb=21_T6209867179&format=GNBFI&sort=BOOLEAN&startDocNo=1&resultsUrlKey=29_T6209867182&cisb=22_T6209867181&treeMax=true&treeWidth=0&selRCNodeID=6&nodeStateId=411en_US,1&docsInCategory=15&csi=11738&docNo=5n

Fox, William F. “State Corporate Tax Revenue Trends: Causes and Possible Solutions.” National Tax Journal 55.3 (Sep. 2002).

McLure, Charles E. “Understanding Uniformity and Diversity in State Corporate Income Taxes.” National Tax Journal 59.1 (Mar. 2008).

Mieszkowski, Peter and George Zodrow. “The Incidence of a Partial State Corporation Tax.” National Tax Journal 38.4 p489-496 (Dec. 1985).

Morris, Will. "European Tax Policy." International Tax Journal 33.5 (Sep. 2007): 29-73. Legal Collection. EBSCO. [Library name], [City], [State abbreviation]. 2 Apr. 2009 <http://proxygsu-geo1.galileo.usg.edu/login?url=http://search.ebscohost.com.proxygsu-geo1.galileo.usg.edu/login.aspx?direct=true&db=lgh&AN=26475018&site=ehost-live[CFC7]>.

“State Corporate Income Tax Rates.” Tax Foundation. (2009).

[CFC1]How so?

[CFC2]What do you mean by greater capitalization?

[CFC3]This is a good thing for society and economists would like it, but a politician would see this as a criticism.

[CFC4]This is very awkwardly worded.

[CFC5]How? Why?

[CFC6]Bad from a political viewpoint?

[CFC7]What the hell is this? Is this supposed to be two separate references.