Want to create jobs? Make Arizona more attractive to businesses. Addressing a weak spot in the tax code, the first thing lawmakers should do is drastically reduce our corporate income tax rate. Arizona’s current rate of just under 7 percent is the third-highest rate in the western U.S. Because many corporations carry out numerous activities in different states, there is an incentive for companies to structure themselves to minimize their tax burdens. Arizona’s corporate income tax rate is a disincentive. From a profit-and-loss perspective, it makes more sense to be headquartered in Las Vegas, Denver, or Dallas than it does Phoenix.
Arizona’s corporate tax system is structurally out of whack, as very few companies shoulder an inordinate tax burden. There were 50,000 corporate income taxpayers in 2006 (most recent data) with a liability of $820 million (next year the budget office is predicting only $500 million). But, because businesses with less than $50 in taxable income only pay $50 in corporate income taxes, an astonishing 68 percent of the filers (34,000) contributed only 0.2 percent of the total revenue ($1.7 million). The remaining $818 million is shouldered by only 16,000 companies; 146 of these companies contributed $575 million in corporate income taxes (65 percent of the total liability). That’s a $3.9 million tax bill for each company. No wonder so few companies headquarter here.
Far from just being bad for the economy, Arizona’s tax rate is bad for workers too. According to the Congressional Budget Office, workers bear slightly more than 70 percent of the burden of high corporate taxes in the form of reduced wages. Similarly, an American Enterprise Institute study demonstrates that a 1 percentage-point increase in corporate tax rates is associated with nearly a 1 percent drop in wage rates.
Reducing the state’s corporate income tax rate is good for business, good for jobs, and ultimately good for the economy.
Steve Voeller is president of the Arizona Free Enterprise Club, a non-profit organization whose mission is to advance policies that promote a strong and vibrant Arizona economy. A longer version of this email appeared in AFEC's Fiscal Note.
Goldwater Institute: How to Restructure Arizona's Tax Code: A Smarter, Flatter Tax Plan to Create Jobs
Congressional Budget Office: International Burdens of the Corporate Income Tax
American Enterprise Institute: Taxes and Wages