Corporate Income Taxes Are Dumb

Sen. Peter Wirth, a Santa Fe Democrat, has tried for some time to enact a unitary corporate income tax. This year’s version is Senate Bill 9. The bill cleared the Senate, but it must be heard and approved in the House by Thursday noon. Gov. Susana Martinez said she will veto the bill regardless.

At issue is the basis on which a corporation calculates the income taxes it owes to a state. That can become very complicated for a multi-state or multi-national operation.

Take a company like Intel. This is a huge manufacturer of computer chips with operations in Oregon, California, Ireland and New Mexico, among many other places. Intel sells nothing in New Mexico and, therefore, it generates no income in New Mexico. However, Intel demands state services, just like the small burger joint down the road does. Intel needs safe drinking water, repaired roads, police and fire protection, public health services, etc. If the burger joint is required to help pay those bills, so should Intel. So states like New Mexico require companies like Intel to calculate taxes on the basis of property it owns in the state or the number of people it employs.

Now take a company like Wal-mart. This is a huge retailer with many New Mexico locations. It sells a great deal in New Mexico. The state can require a Wal-mart to base its income taxes on sales that take place in New Mexico.

Unitary taxation would require companies to base their New Mexico income taxes on the income companies earn throughout their operations, including operations based in other states. So an Intel would find itself paying taxes based on revenue it generates by selling chips to, say, Dell Computer, which is headquartered near Austin. To no one’s surprise, Intel doesn’t care for the idea.

Wirth’s bill was amended in the Senate Finance Committee to apply only to retail stores with 30,000 square feet under one roof, which is to say it was amended to apply to the Wal-marts of the world.

The idea of unitary taxation is to get the companies with the most money to pay more tax, especially if those companies, like Wal-mart, are going to do business in the state regardless of tax policy because the customers are here. Intel has a choice of where it locates, but once it has invested billions in a plant, it is less likely to leave.

Some economic development folks advocate a completely different corporate income tax approach. They would like to see taxes based entirely on sales that occur within the state. That becomes, in effect, a tax cut for companies like Intel that sell nothing in the state. Wal-mart would keep paying taxes. The idea is that you can attract another Intel if you can find a way to reduce their taxes. Wal-mart and Home Depot will come here regardless, because they want to be in every market.

How ever taxes are calculated, corporate income taxes are dumb. They are ultimately paid by consumers and workers. Corporations manage their businesses to earn a rate of return. The rate of return they require is based on things like competition, risk and cost of capital. They will get that return no matter how they are taxed. The cost of taxes is therefore passed through to consumers or absorbed by the company in the form of lower wages and benefits to workers. The most recent studies I’ve seen show most companies constrain wages when their taxes increase.

So we have companies tying themselves into knots trying to calculate and avoid taxes. We have conflicting political agendas when we try to decide which basis to use when calculating corporate income taxes. Any choice we make ends up punishing some companies over others. And no matter how we tax corporations, the ordinary worker picks up the tab anyway.

Next year’s Legislature should simply dump corporate income taxes entirely.