The recent news of Carrier Corporation’s choice of locating jobs in Indiana vs. Mexico highlights that state taxes also matter in multinational corporations’ investment decisions. As noted in our January 6th blog, origin-based US state and local businesses taxes, such as property taxes and sales taxes on business inputs, are greater than the US federal corporate income tax. Those origin-based taxes affect business location decisions.
What is newsworthy about the Carrier decision is that it may signal a growing recognition by the U.S. federal government of the importance of state and local business taxes in U.S. business location decisions (“competitiveness”). The Carrier decision was significantly based on additional state tax incentives. The negotiations were the result of the Twitter-pulpit of President-elect Trump and his Vice-President Elect and then-current Indiana Governor Pence.
From the perspective of state government policymakers the Carrier negotiations may be seen as a mixed blessing. States have always strongly defended their "independence" from federal involvement in state tax policy. The new federal Administration may result in the federal government attempting to have more influence on which states benefit from new business jobs and investment. In addition to choosing winners or losers among businesses, the federal government may exercise more influence in choosing which states are winners or losers. States may be understandably concerned if this happens.
Multistate corporations' extensive domestic tax legislative activities highlight the importance of state and local taxes to business. These have included on-going challenges to assessed values of taxable business property at the local level, support for reduced sales taxation at business input at the state level, and advocacy for lower rates and more generous general as well as targeted tax credits or incentives. Individual negotiated "deals" already common in many states may occur more often as a result of a presidential Twitter blast.
The new federal Administration may signal a more proactive policy of encouraging particular business behaviors, such as locating economic activity in the U.S. It may also signal a stronger federal role in the U.S. fiscal federalism, contrary to Republicans’ conventional backing of greater states’ rights, at least in the area of tax and business incentives.
Robert Cline and Tom Neubig