Corporate Income Tax: To Cut or Not

Some say it is time to give the corporate income tax the hook, but revenue loss would add to budget crisis

Gov. Rick Scott has announced some big plans. One idea on the cost-cutting corporate cowboy's agenda is to eliminate Florida's corporate income tax, which has been in place since 1972 when Floridians voted it in.

The thinking then was that revenues from the corporate income tax would help pay for things such as education, health care and transportation throughout the state. It's those kinds of services, along with others, that keep residents in a state and attract others. But if Florida didn't have a corporate income tax, Scott thinks the state would become even more attractive to newcomers and new businesses.

Maybe so -- but the state is already in a budget crisis and cutting the corporate income tax comes with a cost, one that includes an initial loss of annual revenues to the state with no guarantees of new jobs nor of businesses moving here. How to square that with the governor's proposed budget cuts in areas such as education and jobs is puzzling.

To some, the idea may make sense conceptually. Even so, supporters might find the timing could be off. Why? Money.

Since Florida already has a budget deficit and revenue problems, decreasing or eliminating the corporate income tax only adds to them. The state, after all, continues to lose revenues from its primary sources -- sales and property taxes -- and pros suggest that a recovery in the real estate market is not likely in the immediate future. So why cut the state's corporate income tax, which at 5.5 percent now is already one of the nation's lowest -- and a revenue producer? According to the figures from a January presentation by the Florida House of Representatives Finance & Tax Committee about Florida's tax structure, nearly $1.5 billion was collected by the state from the corporate income tax in fiscal 2009-10.

Scott's plan is to phase out Florida's corporate income tax from 5.5 percent a year down to zero over seven years. If the Legislature agrees, it would be reduced by 2.5 percent beginning this year.

Whatever your stand, one fact that can't be overlooked is this: When it comes to governing a state, chopping a few million dollars here and a few million there can create a hole that, more than likely, will need refilling. Looked at another way, when you're already in a hole, stop digging.

As do other new governors elected last fall, Scott says it's time for states to be run like businesses. The rub is that a state is not a corporation. A corporation's loyalty is to its shareholders, and a state's loyalty is to the public and the many diverse residents who make up its population.

"What government is designed for is to accommodate the common good of all of its people. It's not designed for the good of its shareholders," says Steven Schoepke, economist and managing director at Aperio Diligence Group.

Blaine Rollins, who managed the Janus Triton Fund until his retirement in 2006, supports eliminating the corporate income tax at both state and federal levels. During a recent telephone interview, he said that if Florida didn't have a corporate income tax, then more industries would move into the state and create more jobs, wages would be higher as would revenues to the state from sales and property taxes, and that prices on many goods and services could be lowered.

"Companies are economic animals and they will want to beat their competitors," says Rollins who just released a YouTube video addressing the benefits of eliminated the corporate income tax. "Or, that instead of lowering prices, or raising their profits, they could choose to pay their employees more."

Scott's office did not return phone calls regarding the subject.

There are only a handful of states without a corporate income tax. A few others are considering eliminating it. South Carolina, for example, liked the idea but scrapped it because of lack of interest. Ohio decided to eliminate it, only to find it didn't work. Rollins said the reason was that Ohio "just replaced one corporate income tax with a different corporate income tax."

With Florida's unemployment rate one of the highest in the nation, at 12 percent, nothing sounds sweeter than more companies moving in, bringing with them higher wages and employees who purchase homes and buy more goods and services. But there are more reasons a company chooses one state than another to locate its business than the fact the state has no corporate income tax.

"Deciding to move into a state is an extraordinarily complex decision," says Schopeke, whose New York-based company focuses on corporate due diligence. "Having a state with no corporate income tax is only one of many factors to consider. The proximity to your customers, having access to the raw materials the company needs, a labor pool that fits it, good services and schools for your employees and their families are just a few of them.

"And of course, lifestyle."

Florida certainly has that, but whether sunshine beats out a state economy that's nowhere near recovery -- with or without a corporate income tax -- remains to be seen.