Deal's plan: Cut corporate income tax

Nathan Deal looks at Georgia’s economic situation and sees a state business climate that hasn’t kept up with neighboring states.

The centerpiece of the Republican gubernatorial candidate’s plan to change that focuses on the state’s corporate income tax. Currently a flat 6 percent rate, Deal would cut it to 4 percent. He also wants to exempt small-business startups from paying any corporate income taxes their first 10 years in business.

The goal, Deal says, is to “give Georgia a competitive edge.”

The Tax Foundation, a Washington-based nonpartisan research center, rates Georgia’s business tax climate as 29th in the nation, one of the worst among Southern states. Deal said the foundation has graded his economic plan and said it would improve the state’s ranking to 16th.

“Nathan is going to serve as Georgia’s top ambassador and salesman to bring new jobs here,” Deal spokesman Brian Robinson said. “When the Legislature passes his Real Prosperity plan, he’ll be able to tell prospective businesses that our corporate tax rates are lower than in surrounding states. But reducing corporate taxes also benefits businesses that already call Georgia home. We need to give businesses in Georgia every possible incentive to create new jobs as well as preserve the jobs we have now.”

Economics and tax experts who reviewed Deal’s plan for The Atlanta Journal-Constitution say Deal’s tax proposals could have an impact, but how much is unclear. One concern that Roger Lusby, a partner in the Atlanta accounting firm Frazier & Deeter, has is that the majority of Georgia businesses wouldn’t directly benefit.

Most of Georgia’s businesses, he said, are structured as “S” corporations, partnerships or limited liability corporations. Those businesses typically don’t pay traditional corporate income taxes. Instead, their income typically is reported on individual income tax returns and taxed at the individual rate.

“His proposal really wouldn’t affect the majority of businesses out there because they aren’t structured as ‘C’ corporations,” Lusby said.

“C” corporations tend to be larger companies. Those bigger firms, however, would see a benefit from Deal’s plan.

“It is certainly a significant benefit to those companies operating in Georgia,” Lusby said.

Georgia’s corporate income tax is the smallest of the state’s “big three” sources of tax revenue. For the fiscal year that ended June 30, the corporate income tax amounted to 4.8 percent of Georgia’s tax intake, while individual income taxes made up 49.5 percent and sales and use taxes 33.7 percent. In dollar terms, the state brought in more than $684 million in corporate income taxes.

Experts at the Tax Foundation argue that cutting the corporate tax rate has side benefits that make it worth the lost revenue. Foundation research found that “a 1 percent drop in the average tax rate leads to a 0.014 percent rise in real wages five years later. In dollar terms, that means wages rise $2.50 for every $1 reduction in state-local corporate income taxes.”

Deal believes lowering the corporate income tax rate would spur expansion of existing Georgia companies and help attract new businesses to locate here. If that happens, those companies will replace the lost revenue through growth, meaning they might pay a lower tax rate but they’ll be more successful and therefore pay more in taxes.

Bruce Seaman, an associate professor of economics at Georgia State University and a member of the state’s Fiscal Research Center, isn’t sure the state can make up the lost revenue through growth, but agrees that the overall dollar amount the state gets from corporate taxes isn’t huge.

Seaman notes that Deal “makes a big deal of the fact that he lowers it to 4 [percent], which would be the lowest of all states in the Southeast. That may or may not be critical.”

Companies would consider the state’s tax rate among many criteria for choosing a location, he said.

“That would be a factor, I can’t deny it’s a factor,” Seaman said. “But they’re probably looking at other areas, too.”

Deal believes it’s an important part of a larger push to improve the state’s business climate. In addition to reducing the corporate income tax, he wants to do away with the state’s “net worth” tax on businesses and eliminate the state inventory tax.

Lusby, the Frazier & Deeter partner, said eliminating the inventory tax “is a great idea, and would certainly be welcome by all businesses.” The net worth tax is another that doesn’t affect most small businesses very much — they typically pay $10 a year. But larger companies could see a big benefit, he said.

“For the Coca-Colas and Home Depots, it can be thousands and thousands of dollars,” he said.

The other major plank in Deal’s economic plan is suspending the corporate income tax for new small businesses for 10 years. Under Deal’s plan, however, most small businesses in the state wouldn’t benefit, as they don’t pay the traditional corporate income tax, but pay taxes on business income through the individual tax return.

Robinson, Deal’s spokesman, said small-business owners would still see a benefit through another part of Deal’s plan that exempts the first $7,000 in individual income from taxes.

But John Carman has another issue with that plan. Carman has owned his own business, Carman Research, for 30 years. His firm conducts clinical trials of pharmaceuticals.

“I started my business with no particular tax advantages,” Carman said, and he isn’t crazy about offering a potential competitor a state-backed boost.

“I don’t know that I’d want to give them a leg up on me,” he said.

Nancy Chorpenning has a front-row seat for the struggle small businesses face. She is a partner in C-Suite Advisors, an Atlanta-based business consulting firm. But she’s also president of the Atlanta chapter of the National Association of Women Business Owners.

Chorpenning said tax concerns are not business’ top concern right now.