Tapping corporate wealth by cutting their taxes

Big shifts in corporate taxation — federal and state — suggest the time is ripe for the radical cure some business circles have long asked for: elimination of double taxation on corporate earnings. Tax the money just once: when it reaches individuals' pocketbooks as dividends and increased stock value.

To do that, we needn't bankrupt our governments. Why not restructure federal and state income taxes to match the losses, targeting compensating tax hikes at the corporate executive and shareholding classes?

So why a big shift now?

Just check what some corporations are up to. They're fleeing to Bermuda or the Cayman Islands to avoid paying any state or federal income tax at all. No matter that they depend on the United States for their work forces, for road and air and rail systems, for environmental protection, even for security from foreign attack. They think they can offload all their tax liability on the rest of us.

At a recent congressional hearing, Sen. Charles Grassley, R-Iowa, held up a saw made by Stanley Works, a 159-year-old Connecticut toolmaker that's intent on opening paper headquarters in Bermuda. The firm has government contracts, Grassley noted, but will end up "evading U.S. taxes and making profits off the taxes of middle-class Americans who are paying their taxes honestly."

Among other firms that have "moved" to offshore mail drops, saving themselves tens or hundreds of millions of dollars yearly, are Seagate Technology, Tyco International, Ingersoll-Rand and Nabors Industries. Such moves are little short of unpatriotic in light of the Sept. 11 terrorist attacks and the need for expanded defense and homeland security outlays, says Rep. Richard Neal, D-Mass.

Yet, in a globalized economy, the temptation to shift profits offshore will only grow.

And raw campaign-cash politics only makes things worse. Don't think that wasn't related to President Bush endorsing and Congress passing huge depreciation write-offs — $114 billion worth in the recently enacted "anti-recession" bill.

That's one reason corporate income-tax payments will plummet to only 1.3 percent of gross domestic product this year, the second-lowest figure in 60 years.

And the first victims will be the already deficit-plagued states that linked their corporate taxes to the federal formula. They stand to lose $14 billion in anticipated revenues in the next three years.

Even more serious, the states are suffering a virtual "collapse of the corporate income tax," according to a fresh report from the Rockefeller Institute of Government in Albany, N.Y. There's been a sharp decline for five straight quarters. From roughly 8 percent of state tax revenues in the early and mid-1990s, corporate income taxes are down to less than 4 percent at last report.

And that decline occurred despite the doubling of corporate profits nationwide — from $431 billion in 1991 to $867 billion in 2000, according to Commerce Department figures.

What's happening? Corporations have lobbied successfully to insert loopholes into state tax formulas. They have pushed their average state income-tax rate down from 6.5 percent in the mid-1980s to 3.8 percent today. Hiring skilled accounting and law firms the average citizen could rarely if ever afford (remember Arthur Andersen?), they've found multiple ways to reduce their tax liabilities.

And on top of that, states have been giving away the store to attract or hold corporations. The average new factory job is costing taxpayers more than $46,000 over a 20-year period, Peter Fisher of the University of Iowa reports in State Tax News. The fiscal benefits virtually never match the costs, he says.

But tax breaks are a zero-sum game — one state's gain is another's loss. And if corporations pay less in taxes or get handouts, then individuals have to be taxed more to pay for legitimate needs ranging from schools to health to transportation.

That is why it's really time for a new game: no corporate income taxes. And matching that nod to the right with one to the left: Congress and the states bolstering income taxes to compensate. Politicos believe income-tax hikes are a political third rail — note President Bush's unyielding insistence on tax cuts and the tax timidity of governors faced with serious deficits.

But if corporations' profits weren't taxed, a lot more of the dollars they earn would flow out into the economy in dividends and stock gains. Lots of that money would show up on tax forms. Taxing those dividends and stock gains for real public needs would only be fair. And that should mean progressive income taxes, not flat rates, suggesting to the nine states that still don't tax incomes (Washington is one) that they'd be smart to join the pack.

Propose all that in the context of zero corporate income taxes — a grand political tradeoff — and maybe it's not so far-fetched after all. We'd be doing with fewer sleek corporate tax accountants, and we'd be paying our inevitable share of society's costs at home instead of at the office.

Neal Peirce's column appears alternate Mondays on editorial pages of The Times. His e-mail address is nrp@citistates.com.

Copyright, 2002, The Washington Post Writers Group