Weekend open thread: Iowa jobs edition

by: desmoinesdem

Sat Feb 26, 2011 at 22:55:15 PM CST

Des Moines business owner Mike Draper published a guest editorial in Saturday's Des Moines Register undermining Republican claims about corporate tax cuts creating jobs:

I recently heard "cutting state taxes will add jobs" delivered with a perfect, deadpan tone, but I was the only one laughing. Wasn't it meant to be a joke?

After all, since starting a small downtown clothing store, Raygun, in 2005, I have added about 25 jobs and never once considered the state tax rate when doing so. [...]

Most job growth nationally and in Iowa will come from small businesses like mine, and many small businesses are set up as S-corporations, which don't pay corporate tax; rather, any profits for the company are paid on the personal tax statements of the owners. So corporate tax cuts will only really affect the largest companies in Iowa, which add the least number of jobs over time.

But for argument sake, let's say the governor wanted to cut state income-tax rates as well to help small businesses add jobs. Say he even reduced my state taxes by 20 percent and I was expected to hire new staff with that savings. On a salary of $40,000 per year, that 20 percent reduction moves my taxes by 1 percent, or 400 annual dollars.

So, indeed, I could hire a new employee with my savings; it would just take 100 years (and by 2111, would $40,000 per year even be enough for them to afford the newest hover-board that all the other guys at the store will have?).

However, if that tax savings were coupled with public pre-K being eliminated for my son, a $400 annual savings may be slightly offset by the additional $8,000 annually I'd have to spend on day care.

With the governor's math, I'd be laying off someone every 5 years and hiring every 100.

State tax collection data doesn't support the claim that corporate tax cuts would help Iowa's small businesses expand:

About 885 businesses, with sales over $25 million in Iowa, paid 65 percent of the state's corporate taxes in 2008. That's $142 million of nearly $219 million paid, Iowa Department of Revenue data show.

In addition, the data show the biggest corporate taxpayers are large retailers with sales outside the state. Iowa taxes companies only for income earned within the state.

Branstad has said small businesses would benefit the most because most of their sales - and income - are within the state.

But data from a state report show the 22,000 companies that have sales exclusively in Iowa contributed just 19 percent of the revenue collected via the state's corporate taxes. That was about $41.6 million in 2008.

The governor has promoted his plan to cut the state's corporate tax rates - with the highest rate at 12 percent - to a flat 6 percent for all companies. Branstad has said the tax cut - along with reducing commercial property taxes and government spending and eliminating regulations that stifle job growth - will help create 200,000 jobs and boost income 25 percent for Iowa families over five years. [...]

But Iowa State University economist Dave Swenson said "it's very unclear to me how this tax cut would create significantly more jobs in Iowa."

Swenson said the proposed tax would be "very beneficial to a lot of large retailers and service firms that serve Iowa demand."

"But cutting the corporate tax rate isn't going to create more of those firms," he said. "And for those large firms we want to attract - the Googles, IBMs, the Microsofts, companies that produce for a worldwide market - it's a meaningless tax cut because they already do not pay very much Iowa corporate tax," given that their sales and services are mostly sold outside Iowa and avoid state tax.

Economist Peter Fisher fleshed out that argument in his recent report on Corporate Taxes and State Economic Growth (pdf file):

Business tax breaks are an expensive and inefficient way to attempt to stimulate a state economy. Because of the small effect of tax breaks on business costs, and the much larger importance of other production costs and location considerations, tax breaks will have little if any positive effect on private- sector employment. In fact, the revenue losses may well produce immediate public-sector job losses. Furthermore, the private-sector employment effects of such tax cuts could be reduced or even eliminated by a long-term deterioration in the quality of public services, which themselves have been shown to be important to businesses making location decisions, and which provide an important part of the foundation for the state economy.

The business owners I know hire new employees when they anticipate greater demand for their goods or services. Tax rates are not a factor in that decision.

This is an open thread. What's on your mind this weekend, Bleeding Heartland readers?

Anyone go to the labor rally on Saturday at the capitol? Snow couldn't keep 70,000 to 100,000 people from attending the labor rally in Madison, Wisconsin.