Business Tax Cuts - Making Up Lost Ground
Recently, Revenue Secretary Bob Kiss and Revenue Deputy Secretary Mark Muchow made news by finally admitting that cuts in the business franchise and corporate net income tax, as well as cuts to the food tax, have cost the state hundreds of millions of dollars in lost revenue, to the tune of $360 million for FY 2015.
Deputy Secretary Muchow justified the tax cuts by saying, while they have cost the state money, there would be no revenue growth without them (Secretary Kiss also justified them by pointing to our improving tax climate index, which at this point should no longer need another response).
But, Muchow's observation brings up an interesting question. Would it have been better for the state to have more revenue now, but little growth, or less revenue, but promised future growth? It's undeniable that the state could use more revenue now, with a $200+ budget gap, and tens of millions of dollars in budget cuts each year, but is that all worth it for future growth?
Let's take Muchow at his word and find out, by looking at the biggest contributor to the shortfall, the business tax cuts. According to documents from the budget office, the cuts to the corporate net income and business franchise taxes will cost $205 million for FY 2015. The CNI/BFT are estimated to bring in $205.8 million in revenue for FY 2015, so, absent the cuts, it can be estimated that FY 2015 could have had $410.8 million in revenue.
Now let's look at future projections. The revenue from the CNI/BFT is projected to continue to fall in FY 2016 and 2017, before beginning to grow again in FY 2018 and FY 2019, with an average annual growth rate of 4.6% which would be pretty good, as the growth rate for those taxes between FY 1999 and FY 2008 was only 2.3%.
So, let's make a few assumptions. First we'll assume that Muchow is right, that we would have an additional $205 million in business tax revenue for FY 2015, but there would be no growth going forward, so that we would stay at $410.8 million for the foreseeable future. Then, let's assume that with the tax cuts, business tax revenue will continue to grow beyond FY 2019 at an annual rate of 4.6%, which again is twice as fast as it grew in the years before the tax cuts took effect. How long will it take for the revenue to recover?
Even with zero growth in the no tax cut scenario, it will take until FY 2036 for revenue from the CNI/BFT to equal what it would have been had the tax cuts not been in place in FY 2015. Over the time period of FY 2015 to Fy 2036, the state will have missed out on over $3 billion.
And that is taking Muchow at his word, that there would be no revenue growth without the tax cuts. As I mentioned above, business tax revenue was growing at an annual rate of 2.3% before the tax cuts. If we assume that revenue would have grown at just 1% per year without the tax cuts, it's not until FY 2043 before the tax cut revenue catches up. And if we assume that the revenue would have grown at its historic rate of 2.3% per year, it wouldn't be until FY 2059 until the tax cut revenue catches up.
There are plenty of areas where the state could be investing $200+ million per year, from higher education to infrastructure, that would have helped grow the state a lot more efficiently than revenue-draining tax cuts.