In California, a barrage of taxes impedes economic growth and investment. The Golden State has the highest top marginal income tax rate, at 13.3 percent, the second highest gasoline tax, at 39.8 cents per gallon, and the highest state sales tax, at 7.3 percent. Unfortunately, California lawmakers are considering a proposal that would increase the state’s corporate tax rate. If passed, California would have the highest corporate tax rate in the country.
Under Senate Bill 37, California’s corporate income tax rate would be increased to 10.84 percent from the current 8.84 percent rate. Some corporations could pay as much as 14.84 percent if California officials determine the businesses are paying their top executive too much money compared to the median wage earned by the rest of its employees.
The bill would increase rates even higher for financial institutions, with the rate for these companies rising from 10.84 percent to 12.84 percent. Corporate pay disparities could make the rate as high as 16.84 percent. The legislation would also punish companies that lay-off or outsource employees in response to the tax with an increased tax rate as a penalty.
These wage restrictions would amount to an unnecessary and extremely burdensome expansion of state government power. When coupled with the corporate tax rate hike, it would hurt job growth and drive even more businesses from California.
One important but often overlooked point about corporate taxes and regulatory costs is they are paid by workers (through lower wages) and customers (through increased prices). In fact, workers bear 50-100 percent of the corporate income tax burden, according to the Tax Foundation. Furthermore, corporate taxes are especially harmful to economic growth because capital can easily be moved to a lower-tax state or out of the country.
The proposed corporate income tax hikes would greatly increase the burden placed on California’s already overtaxed population. Instead of raising tax rates on job creators, lawmakers should reform the state’s harsh regulatory climate and reduce or eliminate state corporate income taxes.
In 1849, Americans flocked to the Golden State for a shot at achieving the American dream. In 2019, the exact opposite is taking place. Unless California’s lawmakers reverse course, the so-called Golden State will continue to lose its luster.
The following documents examine corporate tax reform in greater detail.
Ten Principles of State Fiscal Policy
https://heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy?source=policybot
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “above all else: Keep taxes low” to “protect state employees from politics.”
Policy Tip Sheet: Corporate Income Taxes
http://heartland.org/policy-documents/policy-tip-sheet-corporate-income-taxes
Former Heartland Policy Analyst Taylor Smith examines corporate income taxes and their effects on economic development. Smith suggests several ways legislators can limit or eliminate their corporate taxes.
The Benefits of Cutting the Corporate Income Tax Rate
https://taxfoundation.org/benefits-cutting-corporate-income-tax-rate/
Erica York of the Tax Foundation argues economic evidence suggests that corporate income taxes are the most harmful type of tax and that workers bear a portion of the burden. Reducing the corporate income tax will benefit workers as new investments boost productivity and lead to wage growth.
Who Benefits from State Corporate Tax Cuts? A Local Labor Markets Approach with Heterogeneous Firms
https://www.nber.org/papers/w20289
This paper estimates the incidence of state corporate taxes on the welfare of workers, landowners, and firm owners. The study finds that firm owners bear roughly 40 percent of the incidence, while workers and landowners bear 30-35 percent and 25-30 percent, respectively.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.
The Heartland Institute can send an expert to your state to testify or brief your caucus, host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact George Jamerson, Heartland’s director of government relations, at [email protected] or 312/377-4000.
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
