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Increasing Business Operations in Florida - Is Lowering the State Corporate Income Tax Rate an Effective Policy Tool_

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Title:
Increasing Business Operations in Florida - Is Lowering the State Corporate Income Tax Rate an Effective Policy Tool_
Creator:
Moore, Mikaela
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Language:
English

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Subjects / Keywords:
Business operations ( jstor )
Business structures ( jstor )
Corporate income taxes ( jstor )
Corporate taxes ( jstor )
Corporations ( jstor )
Financial investments ( jstor )
Government human services ( jstor )
State taxes ( jstor )
Tax incentives ( jstor )
Taxes ( jstor )
Corporations--Taxation
Economic development
Florida
Florida. Legislature
City of Orlando ( local )
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Undergraduate Honors Thesis

Notes

Abstract:
Governor Rick Scott (R-FL) and members of the Florida Legislature have repeatedly expressed interest in decreasing or eliminating Florida’s corporate income tax as a way of generating economic prosperity within the state. While the political rhetoric is largely divided along party lines, the economic impact of such a decision depends on the variables evaluated. The need to generate additional jobs and economic activity within the state is apparent, but the vast majority of literature indicates that decreasing the state corporate income tax rate and/or offering industry specific or targeted tax incentives will not result in sustainable growth. If the goal of any proposed policy is not only to increase the number of available jobs but also offer high-skill, high-quality jobs, decreasing the state corporate income tax rate, in isolation, is an ineffective policy tool. The state of Florida would better utilize their limited resources by pursuing long-term growth strategies and emphasizing investments in public education, transportation, infrastructure, and other factors that impact company location and job quality. ( en )
General Note:
Awarded Bachelor of Arts in Business Administration; Graduated May 8, 2012 magna cum laude. Major: Business Administration - General Studies
General Note:
College/School: Warrington College of Business Administration
General Note:
Advisor: David Denslow

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University of Florida
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University of Florida
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Copyright Mikaela Moore. Permission granted to the University of Florida to digitize, archive and distribute this item for non-profit research and educational purposes. Any reuse of this item in excess of fair use or other copyright exemptions requires permission of the copyright holder.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool ? Mikaela Moore Bachelors of Arts in Business Administration 1 University of Florida ABSTRACT Governor Rick Scott (R FL) and members of the Florida Legislature have repeatedly way of generating economic prosperity within the state. While the political rhetoric is la rgely divided along party lines, the economic impact of such a decision depends on the variables evaluated. The need to generate additional jobs and economic activity within the state is apparent, but the vast majority of literature indicate s that decreasi ng the state corporate income tax rate and/or offering industry specific or targeted tax incentives will not result in sustainable growth If the goal of any proposed policy is not only to increase the number of available jobs but also offer high skill, high quality jobs decreasing the state corporate income tax rate, in isolation, is an ineffective policy tool The state of Florida would better utilize their limited resources by pursuing l ong term growth strategies and emphasizing investments in public education, transportation, infrastructure, and other factors that impact company location and job quality. Keywords: corporate income tax rate, job skill, economic prosperity, Florida Faculty Advisor: Dr. Dave Denslow, Department of Economics University of Florida 1 A nticipated May 2012

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 2 of 31 I. I NTRODUCTION unemployment rate hove rs around ten percent of its labor force the state Legislature is desperate to spur economic activity and job creation Governor Rick Scott (R FL) has repeatedly expressed interest in seeing the corporate tax rate eliminated during his tenure but has been unsuccessful at achieving this goal. 2 Mar y Shanklin of the Orlando Sentinel report ed on February 22, 2012 that Pennsylvania, Minnesota, New Jersey, Rhode Island, and California However, those states with the lowest tax rates are home to only 52 Fortune 500 headquar ters 3 Will further decreasing the corporate income tax rate overcome this disconnect ? As corporate tax cuts become an increasingly popular topic in national, state, and local campaign rhetoric the Legislature must determine whether or not this policy tool will generate the desired outcome: increased economic prosperity in the state of Florida. A 2010 article written by Duanjie Chen and Jack Mintz for the Cato Institute argues ] should reduce their corporate tax rates and reform their sales and other capital related taxes to ensure that these levies do not impose a burden on capital investment.. policymakers have much work to do 4 However, Jonathan Hamilton, a University of Fl orida economics professor who just lowering the corporate tax rate 2 Although Governor Scott has been unsuccessful at eliminating the corporate income tax entirely, the 2012 Legislative session heralded in a handful of tax breaks and exemptions related to the corporate income tax. 3 See Mary Shanklin, s Low Corpor ate Taxes Not Its Biggest Draw Survey Finds Orlando Sentinel (March 2, 2011), available at http://articles .orlandosentinel.com/2011 03 02/business/os corporate tax rate 20110302_1_tax exemptions corporate taxes tax incentives 4 See Juanjie Chen and Jack Mintz, U.S. Effective Corporate Tax Rate on New Investments: Highest in the OECD, CATO Institute Tax and Budget Bulletin No. 62 (May 2010), available at http ://www.cato.org/pubs/tbb/tbb_62.pdf

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 3 of 31 without doing anything else is effectively a reward for old investment 5 unemployment, job openings, and busin ess creation is the same for both parties; yet, their opinions stand in stark contrast to each other. To some degree, states have levied taxes on business activities since the formation of the United States of America. However, modern day corporate incom e tax is derived from which was adopted by 39 states by the early 1950s 6 Florida currently has the fifth lowest state corporate income tax rate bested only by South Dakota, Alaska, Wyoming, and Nevada 7 As of 2011, Florida is home to 16 Fortune 500 company headquarters 8 The largest of which, Publix Super Markets, boast s average annual revenue s of over $ 25 million dollars 9 According to the Florida Department of Revenue website corporate income tax liability is determined using the following guidelines: 5 See William Gibson, Would Cutting Corporate Tax Rates Help Florida Orlando Sentinel (February 22, 2012), available at http://articles.sun sentinel.co m/2012 02 22/news/sfl would cutting corporate tax rates help florida 20120222_1_corporate tax minimum tax obama and republicans 6 this law. A decade later, a nother 17 states had implemented a corporate income tax. See David Brunori and Joseph J. Cordes, The State Corporate Income Tax: Recent Trends for a Troubled Tax American Tax Policy Institute, (April 15, 2005). http://www.americantaxpolicyinstitute.org/pdf/StateCorpTax 8 15 05 _2_.pdf 7 Florida is one of 47 states to tax corporate net income even though the state Legislatu re has typically avoided taxing income. See David Brunori and Joseph J. Cordes, The State Corporate Income Tax: Recent Trends for a Troubled Tax American Tax Policy Institute, (April 15, 2005). http://www.americantaxpolicyinstitute.org/pdf/StateCorpTax 8 15 05 _2_.pdf 8 See Enterprise Florida, http://www.eflorida.com/IntelligenceCenter/download/WF/CL_Forbes_Headquarters.pdf (last visited March 16, 2012). 9 Id. Public Super Markets, which is headquarted in Lakeland, ranked 102 nd nationally of Fortune 500 companies in 2011 according to Enterprise Florida. The smallest of the 16 Fortune 500 companies headquarted in Florida, Ryder System, took 437 th place nationally with $5.1 million dollars in annual sales. See Fortune Fortune 500 Companies Headquarted in Florida 2011, Enterprise Florida, http://www.eflorida.com/IntelligenceCenter/download/WF/CL_Fortune_500_Company.pdf (last visited March 16, 2012).

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 4 of 31 A corporation doing business outside Florida may apportion its total income. Adjusted federal income is apportioned to Florida using a three factor formula. The formula is a w eighted average, designating 25 percent each to factors for property and payroll, and 50 percent to sales 10 You should add nonbusiness income allocated to Florida to the Florida portion of adjusted federal income. You should then subtract an exemption of u p to $5,000 to arrive at Florida net income. 11 Finally, you should compute tax by multiplying Florida net income by 5.5 percent. 12 Through the current taxation mix, Florida emphasizes sales more than real estate or profit but, by some accounts, still penalizes those looking to create jobs by allocating 25 percent of the tax to payroll. In the 2012 State Business Tax Climate Index the Tax Foundation awarded Florida the fifth best business environment and states that, ceter is paribus a state that raises 13 Is the advantage identified by the 2012 State Business Tax Climate In dex not having a personal income tax enough to make Florida a competitive destination for companies looking to expand their operations ? In rough economic times and uncertain markets, would removing another of the major taxes in this case the corporate income tax, be a wise policy tool? This 10 weighting the sales factor benefits corporations with significant property and payroll in the state. Accordingly, many politically powerful corporations have lobbied for a formula that double weights sa les. See David Brunori, State Tax Policy: A Political Perspective 3 rd Ed., The Urban Institute Press (2011). 11 In the 2012 Florida Legislative Session, House Bill 71 85 increased exemption s from $5,000 to $25,000 effective for tax years beginning on or after January 1, 2012. See Changes to Florida Corporate Income Tax and Emergency Excise Tax Florida Department of Revenue Tax Information Publication 11C01 01, http://dor.myflorida.com/dor/tips/pdf/tip11c01 01.pdf (July 18, 2011) 12 See Florida Department of Revenue, http://dor.myflor ida.com/dor/taxes/corporate.html (last visited October 7, 2011). 13 creation. In the 2012 State Business Tax Climate Index it is noted that every state le vies property taxes and unemployment insurance but states that choose not to levy a corporate tax, individual income tax, or sales tax are catapulted to the top of the rankings. See Mark Robyn, 2012 State Business Tax Climate Index Tax Foundation Backgro und Paper Number 62 (January 2012), available at http://taxfoundation.org/files/2012_tax_foundation_index_bp62.pdf

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 5 of 31 paper will examine the arguments for and against lowering the state corporate income tax rate a selection of policy options a state could employ to generate increased business operations a brief empirical analysis to determine the relationship between high quality jobs and the corporate income tax rate, and recommendations for the state of Florida based on these findings. For the ion imposed by government upon individuals, for the use and service of the state, whether under the name of toll, tribute, tallage, gabel, impost, duty, custom, excise, subsidy, aid, supply, or other name. 14 II. THE EFFECTIVENESS OF DECREASING THE CORPORATE TAX RATE Despite reviewing the same data, economis ts po liticians, corporations, and the opinions on the effectiveness of lowering the corporate tax rate vary widely. Those who oppose the state corporate income tax rate argue that it is an econo mic burden tha t distorts normal market forces and that eliminating the tax will competitiven ess relative to other locations ultimately allow ing companies to create jobs with funds which would have otherwise been inefficiently used by the government. Proponents of the corporate income tax rate argue that any cuts to the tax diminishe s funding for public services, is not a s strong of a in terms of job creation, and has historically been an unsuccessful political ply The following is a compilation of the literature used to support both schools of thought. A. Opponents of the State Corporate Income Tax Those who support decreasing or removing the corporate tax rate typically advocate for a less regulated market system. Taxes distort normal market forces by increasing the costs 14 See Definition of Tax nd Ed., http://blackslawdictionary.org/tax/ (Last visited November 11, 2011).

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 6 of 31 associated with certain regions, items, services, and related goods; therefore, decreasing the attractiveness of supplying these goods According to the Center on B udget and Policy Priorities, decreasing the corporate income tax rate has two di rect benefits: 1) it increases the after tax profit of a company and 2) it increases the after tax profitability of certain investments 15 The first of these benefits, an increase in the after tax profit, would leave more liquid are no longer required to pay corporate building new faciliti es, hiring additional employees, expanding product s or services offered purchasing additional materials, training employees, and other activities that increase the overall welfare of the state and its citizens As part of the larger multiplier effect of t he corporate tax rate, the additional dollars pumped int o the economy would spur a similar increase in spending on consumer and household goods throughout the state 16 Opponents of the corporate income tax rate also argue that the economic development cause d by corporations is vital to the state economy and should not be penalized. Corporations, their employees, and vendors all pay property taxes and consumptions taxes which increase the overall revenue of the state in which they operate. The second benefit, increasing the after tax profitability of in state investments, entices businesses to increase their in state operations. Opport unities that may have once been u nprofitable or did not yield a profit consistent with the associated risks may be reconsidered 17 A third argument, which can be roughly derived from the previous two, is that taxes are frequently paid for by the end consumer shareholders, or employee s The economic burden of 15 This view assumes that any cuts to the corporate tax rate would have a long term positive multiplier effect. See Michael Mazerov, Cutting State Corporate Income Taxes is Unlikely to Create Many Jobs, Center on Budget and Policy Priorities (September 14, 2010), available at http://www.cbpp.org/files/9 14 10sfp.pdf 16 Id. 17 This assumes that i f the costs associated with a given project decrease s ceteris paribus, the profits resulting from a given venture will increase an equivalent dollar amount.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 7 of 31 form of higher prices, to shareholders and other holders of capital in the form of lower returns, or shifted backward to workers in the form of lower wages 18 In a 2005 survey published by the Kansas City Federal Reserve, the wages of employees decreased by half a percent for every one percent increase to the state corporate tax rate 19 In any of these scenarios, the result is a net economic loss to society as one of these entities has le ss discretionary income to spend on goods and services in the If increases to the corporate tax rate are paid for by the consumer, r eductions to state levies should theoretically benefit the employees and end consumer through more discreti onary income to spend in the economy and lower ed prices, respectively Proponents for decreasing the state corporate income tax rate also point to the questionable long term viability of this tax. The percentage of revenue the corporate income tax contrib utes to the state budget has steadily decreased over the past few decades representing less than two percent of state tax and nontax revenues 20 by the revenue collected from consumption, excise, and property taxes. 21 Additionally, corporations allocate exorbitant amounts of financial and human capital to comply with corporate income tax laws. T he private paid attorneys a nd accountants also significantly raise the costs of 18 Matthew Jensen and Aparna Mathur, Corporate Tax Burden on Labor: Theory and Empirical Evidence American Enterprise Institute (June 2, 2011) available at http://www.ae i.org/files/2011/06/06/Tax Notes Mathur Jensen June 2011.pdf. 19 The survey was conducted by the Kansas City Federal Reserve and data from 1992 to 2005 was monitored in their analysis. 20 In 1977, the state corporate income tax rate represented roughly 9.5 percent and has declined steadily since However, corporate profits have increased, adjusted for inflation, during the same time period. See David Brunori, State Tax Policy: A Political Perspective 3 rd Ed., The Urban Institute Press (2011). 21 Id.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 8 of 3 1 individuals to defend the tax. 22 For these reasons, many regard the state corporate income tax rate as f lawed and harmful to economic prosperity. B. Proponents of the State Corporate Income Tax However, there are also those who favor maintaining the current corporate tax rate. They income tax rate does not create an incentive for investment or job creation, does not produce any economic stimulus in the short run, may have adverse impacts on long term state prosperity because of decreased funding for public services, and does not have a proven histor y of success in generating economic prosperity. 23 Since the average state corporate income tax usually represents less than ten percent of total business taxes, a blanket el company. 24 The corporate income tax only affect s a select nu mber of companies in each state because s ole proprietorships companies, and other small entities are typically exempt. T herefore, decreasing or eliminating this tax will not have a direct impact on the se business even though these smaller entities make up over 30 percent of total business profits 25 Rather than spending the additional revenue amount from the tax credit in ions will likely distribute some of their tax savings to out of 26 22 The s tate corporate income tax rate uses a disproportionate amount of time and resources for litigation See David Brunori, State Tax Policy: A Political Perspec tive 3 rd Ed., The Urban Institute Press (2011). 23 See Michael Mazerov, Cutting State Corporate Income Taxes is Unlikely to Create Many Jobs, Center on Budget and Policy Priorities (September 14, 2010), available at http://www.cbpp.org/files/9 14 10sfp.pdf 24 Id. 25 Id. 26 Id.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 9 of 31 Moreover, some argue that a is not as strong of a motivator as a 27 Without a significant increase in demand, corporations will not have the incentive to spend the marginal revenue dollars on salaries for new common form of a ge neral cut in business taxes is a reduction in the corporate tax rate. This approach, however, is not a particularly cost effective method o f stimulating business spending. Increasing the after tax income of businesses typically does not create an incentive for them to spend more on labor or to produce more, because production depends o n the ability to sell output. 28 in business tax rates will tend to generate significantl y less investment demand for each dollar of [lost] rev e nue than a cut that applies only to new investments 29 Corporations for which the tax rate does apply m ay actually face a net loss if the state corporate income tax rate is decreased or eliminated 30 Corporations who pay less to the state in corporate income taxes will face a higher federal income tax because, under the current system, businesses can deduct the payments used to satisfy the state corporate income tax from their federal inco me tax amount. Unless a decrease in state taxes is met with an exact percentage decrease in federal taxes, corporations may simply face a higher federal tax rate as a result of a nt 27 Id. The statistics cited in the Center on Budget Policy Priorities report is based on national averages. percent increase in revenue for the companies operating within its jurisdiction should the state choose to elim inate its corporate income tax. 28 Id. 29 Id. This is because excess capacity already exists at the time of offer, usually as a result of an economic recession or decrease in demand. Excess capacity cannot be solved by eliminating or 30 One k ey reason for maintaining the corporate income tax rate is to balance the discriminatory effects of the property tax rate. Capital intensive corporations are tax ed more heavily by the property tax because of intangible property. The state corporate income tax rate based companies. See David Brunori, State Tax Policy: A Political Perspective 3 rd Ed., The Urban Institute Press (2011).

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 10 of 31 decrease in the state corporate tax rate or business functions to avoid additional federal taxes Last ly, proponents of the state corporate income tax contend that businesses should be required to pay for the public services they util ize. Like regular citizens, corporations rely on infrastructure, public education, judicial systems, and other public services. Infrastructure, such as roads, airports, harbors, and freight lines, insure the reliable shipment of raw goods to their faciliti es and finished goods to market. Educated workforces are developed in the classroom and public schools are responsible for creating a workforce with the skills necessary to compete in a udicial system protect and patents both of which are particularly important to highly technical or skills related industries. 31 that is, that tax liabilities are impos ed to compensate for the benefits received 32 David Brunori truth: services cannot continue without public funding. Thus, the question is not whether states will r aise the necessary money, but from which groups the funds w 33 III. PUTTING THE ARGUMENTS IN TO PERSPECTIVE income tax rate as a tool for generating economic growth depends on what part of the data is analyzed. Even if a state could control for the negative externalities caused by decreasing the corporate tax rate, would this 31 See David Brunori and Joseph J. Cordes, The State Corporate Income Tax: Recent Trends for a Troubled Tax American Tax Policy Institute, (April 15, 2005). http://www.americantaxpolicyinstitute.org/pdf/StateCorpTax 8 15 05 _2_.pdf 32 Id. 33 See David Brunori, State Tax Policy: A Political Perspective 3 rd Ed., The Urban Institute Press (2011).

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 11 of 31 policy tool be effective at generating sustainable economic growth and luring companies into the state ? This corporate income tax rate against the federal corporate tax rate and as a part of the larger site selection criteria. A. The State Corporate Tax Rate vs the Federal Corporate Tax Rate The state corporate income tax rate pales to the federal corporate income tax. The current tax rate in the United States is 35 percent, 15 percentage points higher than average for Organization for Economic Cooperation and Development c ountries whereas most state corporate income tax rates are below 15 percent 34 However, President Barack Obama recently proposed cutting the corporate tax rate to 28 percent to spur economic growth and bring the U.S. corporate income tax rate in line with other countries 35 At the time of writing, no legislation has been advanced to accomplish this goal. statutory corporate income tax rates. Of the 30 nations in the Organization for Economic Cooperation and Development, 27 cut their general corporate income tax rates since 2 0 00, with an average cut of more than seven have reformed their corporate t ax bases to reduce the disparity of tax burdens across business 34 At a 35 percent effective tax rate, the United States is also hig her than average for the 80 countries taxes; however, state corporate income taxes are typically deducted for the purpose of calculating the taxable inc o me amount at the federal level. See Robert Carroll, The Importance of Tax Deferral and A Lower Corporate Tax Rate Tax Foundation Special Report No. 174 (February 19, 2010), available at h ttp://www.taxfoundation.org/news/printer/25842.html 35 The Orlando Sentinel reported that the plan would close tax loopholes and subsidies to make up the loss of government revenue caused by the proposed cuts. See William Gibson, Would Cutting Corporate Tax Rates Help Florida Orlando Sentinel (February 22, 2012), available at http://a rticles.sun sentinel.com/2012 02 22/news/sfl would cutting corporate tax rates help florida 20120222_1_corporate tax minimum tax obama and republicans

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 12 of 31 activities. 36 These actions have enticed many companies to shift investments and profits abroad to countries with lower tax rates. The 25 th Annual Corporate Survey found that 48 percent of new facilities were constructed in Asia and eleven percent of new facilities were constructed in South America 37 There is a clear trend of c ompanies moving their headquarters and jobs abroad to China, South Korea, and other low tax destinations. 38 In comparison to the federal corporate tax rate, individual states are merely competing for a finite number of jobs that remain in the United States as the rest have relocated to countries that offer a lower tax haven. To combat this, Robert Carroll, autho r of the February 2010 Tax Foundation special report, suggests a federal corporate income tax rate between 20 to 25 percent and a state tax between five and seven percent would put the United States in line with other OECD member nations and G 7 economies 39 It would seem that lowering the federal corporate tax income rate would have a greater impact on economic productivity that decreasing the state corporate income tax rate. However, Bruce Bartlett, an economic adviser in the Treasury argues that federal taxes are lower than they 36 Duanjie Chen and Jack Mintz, U.S. Effective Corporate Tax Rate on New Investments: Highest in the OECD CATO Institute Tax and Budget Bulletin No. 62 (May 2010), available at http ://www.cato.org/pubs/tbb/tbb_62.pdf 37 The 25 th Annual Corporate Survey analyzed new facility creation in 2010. See 25 th Annual Corporate Survey, Area Development Magazine (Winter 2011), Geraldine Gambale, Ed., available at http://www.areadevelopment.com/AnnualReports/jan2011/25th annual corporate executive s urvey48843.shtml?Page=1. 38 Although China and South Korea each have worldwide tax systems, their tax rates are 25 percent and 24.2 percent respectively. Both of these tax rate s are significantly lower than the U.S. federal tax rate. See Tom Beubig, Thomas Kinrade, and Tiffany Young, Landscape Changing for Headquarted Locations: An Update, Ernst & Young Center for Tax Policy Tax Insights (September 2011), available at http://tmagazine.ey.com/wp content/uploads/2011/11/CTP_Changing_Headquarter_Landscape_2011 09 22_YY2550.pdf. 39 Carroll acknowledges in his writing that determining how to pay for this steep cut in federal corporate income taxes is outside of the scope of his argument, but notes that other c ountrie s have effectively balanced their budgets using t hese lower rates. See Robert Carroll, The Importance of Tax Deferral and a Lower Corporate Tax Rate Tax Foundation Special Repor t No. 174 (February 19, 2010), available at http://www.taxfoundation.org/news/printer/25842.html

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 13 of 31 have been for the past 60 years and decreasing the rate has not generated the type of economic prosperity one might expect. 40 Moreover, the Congressional Budget Office estimated th at the federal corporate inco me tax w as expected to raise slightly more than one percent of G ross D omestic P roduct in revenue during 2011 approximately a third of the percentage it represented decades prior 41 If taxes on corporate income as a percentage of Gross Domestic Product ar e used as an indicator, the United States actually has the lowest corporate ta x burden as a percentage of GD P of any nation in the Organization for Economic Cooperation and Development 42 If the United States were to decrease the federal corporate income tax rate, it is likely that other nations would the rate at which world nations will stop competing on corpo rate income tax rate s and how individual nations will accommodate for the loss of revenue from these cuts B. Site Selection Factors As states debate whether or not to decrease the taxes they levy on corporations, it is also important to discuss the relative importance of the state corporate income tax when determining the location of new facilit ies The 25 th Ann ual Corporate Survey asked respondents to rank a 40 The opinion piece does not specify the type of federal taxes included in this account, bu t is assumed to reference federal taxes as a whole for this estimate. See Bruce Bartlett, Are Taxes in the U.S. High or Low? The New York Times (May 31, 2011), available at http://economix.blogs.nytimes.com/2011/05/31/are taxes in the u s high or low/ 41 Id. In the 1950s, federal corporate taxes accounted for approximately 3 percent of Gross D omestic P roduct. The Congressional Budget Office does not say whether the figures quoted were adjusted for inflation or were merely represented as a fraction of GDP, which alth ough greater in dollar amount, would reflect a comparable pair of numbers. 42 Id. s in 2010 to determine the effec tive corporate tax burden as a percentage of G.D.P.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 14 of 31 to locate a site for the past decade, and it was ranked in the top two categories of importance by 97.3 percent of survey respondents. The authors of the study infer that a l ack of infrastructure or and/ or a lack of reliable transportation immediately disqualifies a site from consideration. B ecause the state tax burden is so low [and] after tax rates of profit do not vary significantly from state to state [a] more likely factor in swaying location decisions is investment infrastructure. Many studies show that infrastructure increase economic 43 In second place, the cost of labor was ranked in the top two categories of importance by 91 percent of respondents. Lastly, operating expense and is a top concern for company executives as reflected in its fourth place finish in the recent 25 th Ann ual Corporate Survey rankings These findings indicate that public services are equally, if not more, important than tax rates. However, this is not to say that taxes are of no importance when selecting a site location. Company executives paid close attention to the taxes in various locations, and the 25 th Ann ual Corporate Survey found that three tax criteria tax exemptions (thir d place), state and local tax incentives (fifth place) and the corporate tax rate (sixth place) were among the top ten criteria considered when determining site location 44 These three tax related criteria have only increased in importance during the last 25 years and reinforces the importance of a manageable state and 43 David Bruno ri also specifically references improving transportation systems as a means to increase economic development. See David Brunori, State Tax Policy: A Political Perspective 3 rd Ed., The Urban Institute Press (2011). 44 The complete ranking are available on line See 25 th Annual Corporate Survey Area Development available at http://www.areadevelopment.com/AddSlideShow.aspx?__VIEWSTATE=%2FwEPDwUKMTI4ODg0OTgz OA9kFgICAw9kFgICAQ9kFggCAQ8PFgIeBFRleHQFAzYwOGRkAgMPDxYCHgdWaXNpYmxlZ2RkAgcP DxYCHghJbWFnZVVybAVDaHR0cDovL3d3dy5hcmVhZGV2ZWxvcG1lbnQuY29tL2FydGljbGVfaW1hZ 2 VzL2lkODE2MThfQ29ycEZpZzI1LmdpZmRkAgkPDxYCHwBlZGQYAQUeX19Db250cm9sc1JlcXVpcmVQ b3N0QmFja0tleV9fFgIFE1NsaWRlU2hvdzEkYnRuX2xlZnQFFFNsaWRlU2hvdzEkYnRuX3JpZ2h0&Slide Show1%24btn_right.x=8&SlideShow1%24btn_right.y=17

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 15 of 31 federal corporate tax rate The ranking of these three criteria indicate the increased emphasis on locality costs as companies are no longer restricted by country or state borders. IV. SECONDA RY OPTIONS It is important to note that decreasing the corporate income tax rate is not the only policy tool at the use some combination of deductions to the corporate income tax rate, industry specific taxes, and/or tax holidays to spur economic growth and productivity. If utilized as an alternative to decreasing the state corporate tax rate, are targeted tax benefits a more effective policy tool at generating economic prosper ity within a state? A. Defining Targeted Tax Benefits taxpayer is able to subtract from the amount of tax that that they owe to the government The value of a tax credit de 45 Tax incentives, according to the National Association of State Development Agencies, can either be offered in the form of industry grants, industrial development bonds and guarantees, general obligation bonds, loan guarantees, privately sponsored developm ent credit corporations, state funded venture capital corporations, umbrella bonds, customized industrial training, and other direct economic incentives or tax abatements 46 These taxes can be offered to a particular company to entice them to remain or move to a particular state and/or to encourage the development of an 45 Tax Credit Investopedia.com, available at http://www.investopedia.com/terms/t/taxcredit.asp#axzz1pUbVsRQO (last visited February 12, 2012). 46 http: //www.unleashingcapitalismsc.org/pdf/Chapter7.pdf pg 133

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 16 of 31 Popular literature usually describes industry specific tax incentives as lobbying mechanism Industry specifi c tax credits makes producing a specific good/service or operating within a particular state more attractive in terms of profit generated from the venture. This type of policy tool encourages a greater production of a particular good or service than normal free market forces would dictate These benefits can be reaped by other businesses, the otherwise not been readily available or available but at a higher premium th an the purchasing price with tax incentives 47 B. Effectiveness of Offering Targeted Tax Benefits to Increase Economic Activity Despite the apparent ease of affect relative prices and profits. In addition, [these incentives destroy] wealth by encouraging firms to shift resources into areas that receive these preferential government favors 48 Nume rous Federal Reserve District banks have also reviewed the costs associated with industry specific tax incentives to determine whether the resources could have been better used in another realm According to Thomas Holmes, an economist in the Research Dep artment for the Federal Reserve Bank of Minneapolis, the overall welfare of United States residents would be greater if federal law forbade individual states from offering industry specific tax incentives 49 His analysis suggests that this ban would effectively increase the tax revenue collected from capital agents and spread the tax burden more evenly thereby decreasing the deadweight costs per dollar 47 Peter T. Calcagno and Frank Hefner, Chapter 7 of Unleashing Capitalism Pub. South Carolina Policy Council Education Foundation (2009), available at http://www.unleashingcapitalismsc.org/pdf/Chapter7.pdf 48 Id. In creating these market distortions, the authors note that there is a significant deadweight cost asso ciated with industry specific taxes 49 Thomas Holmes, Analyzing a Proposal to Ban State Tax Breaks to Businesses, Federal Reserve Bank of Minneapolis Quarterly Review Vol. 19, No. 2 (Spring 1995), available at http://www.minneapolisfed.org/publications_papers/studies/econwar/qr19 2 2.pdf

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 17 of 31 collected 50 By evenly distributing the tax burden, Holmes argues that states reduce the marginal soc ial cost of taxes and allows policymakers to spend more on public services 51 violates the princ iples of sound tax policy. The i has had undesirable effects. In addition to shrinking the tax base, it has pitted states against each other in the endless 52 By reducing the competition between states in the form of industry specific incenti ves, we can increase the overall welfare of the public. Moreover, Peter Calcagno and Frank Herfner, co authors of Unleashing Capitalism argue that tax incentives have been historically un successful at spurring economic growth and development. Studies at both the state and local level reveal that state tax breaks are ineffective 53 Comprehensive studies have been done since 1989 and found that there has been little, no, or a negative impact on job creation in states which offer tax incentives Table 1: Empirical Studies of Tax Incentive Efficacy 54 Study Region/Time Findings Ambrosius (1989) National study of development incentives, 1969 1985 No evidence of incentive impact on manufacturing value added or unemployment, thus suggesting that tax incentives were ineffective. Trogan (1999) National study of state economic growth and development programs, 1979 General fiscal policy found to be mildly effective, while targeted incentives reduced economic 50 Id. 51 Id. 52 See David Brunori, State Tax Policy: A Political Perspective 3 rd Ed., The Urban Institute Press (2011). 53 Peter T. Calcagno and Frank Hefner, Tax Incentives: Costly, Inefficient and Distortionary Chapter 7 of Unleashing Capitalism, Pub. South Carolina Policy Council Education Foundation (2009), available at http://www.unleashi ngcapitalismsc.org/pdf/Chapter7.pdf 54 Id. The authors note that there are a number of series flaws that are inherent when conducting economic impact studies. Some of these shortcomings are the lack of a uniform way of counting income and job creation, th ere is usually a reallocating of the current labor force when new jobs open and the percentage of previously unemployed residents obtaining positions is small, and it is difficult to properly facility.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 18 of 31 1995 performance (as meas ured by per capita income). Gabe and Kraybill (2002) 366 Ohio firms, 1993 1995 Small reduction in employment by tax incentives. Fox and Murray (2004) Panel study of impacts of entry by 109 large firms in the 1980s No evidence of large firm impacts on local economy. Edmiston (2004) Panel study of large firm entrance in Georgia, 1984 1998 Employment impact of large firms is less than gross job creation (by about 70%), and thus tax incentives are unlikely to be efficacious. Hicks (2004) Panel study of gaming casinos in 15 counties (matched to 15 non gambling counties) No employment or income impacts associated with the opening of a large gambling facility. There is significant employment adjustment across indus tries LaFaive and Hicks (2005) MEGA tax incentives, 1995 2004 Tax incentives had no impact on targeted industries (wholesale and manufacturing), but did lead to a transient increase in construction employment at the cost of roug hly $125,000 per job. Hicks (2007a) EDA grants to Wal Mart in the 1990s The receipt of a grant did increase the likelihood that Wal Mart would locate within a county (about $1.2 million generated a 1% increase in the probability a county would receive a new Wal Mart), but this had no effect on retail employment overall. Hicks (2007b) Panel study of entry by large No permanent employment increase across a quasi stores from 1998 to 2003. Source: Page 135 Additionally, companies that receive targeted incentives rarely fulfill the proposed value added benefits promised Companies quickly relocate to other states when a better incentive

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 19 of 31 package is offered or when the current incentives expire. 55 As they are subject to little oversight, recipients of targeted incentives may blame an unfavorable business climate, lack of cu stomers, or other macroeconomic factors for their underperformance From 1990 to 2000 the U nited State auto mobile industry was one of the most flagrant violators. The cost per job for this industry ranged from $ 59 thousand dollars to $ 192 thousand dollars with no clear indication that the indirect economic benefits associated from these additional jobs outweighed the costs of the incentives provided 56 Table 2: U.S. Auto Plant Investments 57 Company State Announcement Date Initial Employment Estimate Announced State and Local Incentives (Millions) Real Incentives (2001 Million) Hyundai Alabama 2002 2,000 $118 $118 Toyota Alabama 2001 350 $29 $29 Nissan Mississippi 2000 4,000 $295 $299 Honda Alabama 1999 1,500 $158 $165 GM Michigan 1998 700 $107 $114 Mercedes Alabama 1994 1,500 $253 $289 BMW South Carolina 1992 1,900 $130 $155 Toyota Kentucky 1986 3,000 $147 $214 Source: Page 138 When Nissan opened its facilit y in Canton, Mississippi in 2001, the company estimated four thousand new jobs would be created as a result o f their efforts. 58 However, only ten percent of the jobs at the new plant were filled by previously unemployed workers or workers who 55 Peter T. Calcagno and Frank Hefner, Distortionary Chapter 7 of Unleashing Capitalism, Pub. South Carolina Policy Council Education Foundation (2009), available at http://www.unleashingcapitalismsc.org/pdf/Chapter7.pdf 56 Id. 57 Table Notes: Inflation adjustments are made using GDP deflator series and real incentives includes only primary incentive an d not additional ongoing incentives. 58 Peter T. Calcagno and Frank Hefner, Distortionary Chapter 7 of Unleashing Capitalism, Pub. South Carolina Policy Council Education Foundation (2009), availabl e at http://www.unleashingcapitalismsc.org/pdf/Chapter7.pdf

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 20 of 31 moved to Madison County, Mississippi to pursue the job opportunity. 59 The other 90 percent of workers lived in the five counties surrounding the plant and commuted and/or left a previously held position to work at the factory. 60 Those that worked in another county continued to pay property taxes in their county of residence, which was not necessarily even a Mississippi County. This suggests that the estimated the $ 73 thousand dollars the state paid in incentives per job opening is a conservat ive estimate that does no t take into account the mobility of workers 61 Although left and right leaning policy think tanks are not normally in agreement, the specific taxes, are ineffective at generating long term growth 62 Most companies in the service sector spend a significant portion of their revenue on intangible assets, such as employee training, intellectual property, research and development, etc, rather than tangible asse ts. Although they significantly increase typically do not benefit from specific tax breaks that reward capital investment and the market is further corrupted as a result of this policy tool 63 Calcagn o and Hefner state that although there is an obvious political motivation for businesses should receive favor, nor do they have the unique ability to identify which of the se 59 Id. 60 Id. 61 This number was derived by the authors by dividing the amount of announced state sponsored incentives by the est imated number of job openings. See Peter T. Calcagno and Frank Hefner, Distortionary Chapter 7 of Unleashing Capitalism, Pub. South Carolina Policy Council Education Foundation (2009), available at http://www.unleashingcapitalismsc.org/pdf/Chapter7.pdf 62 See Juanjie Chen and Jack Mintz, U.S. Effective Corporate Tax Rate on New Investments: Highest in the OECD, CATO Institute Tax and Budget Bulletin No. 62 (May 2010), available at http ://www.cato.org/pubs/tbb/tbb_62.pdf 63 Id.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 21 of 31 business es will succeed. This is the role of the private sector and the profit and loss system 64 gives the appearance that the Legislature is making discer nible efforts to spur economic activity within their state in a risk neutral way. 65 If there is economic activity as a result of tax incentives, the Legislature was responsible for s olving the economic woes of the state; if there is no economic activity as a result of the tax incentive, the Legislature can blame the macro effects of the economy that are outside of their control for the stagnant growth. Unfortunately, requests for ill invest and locate. [However,] once states offer tax incentives to a lucky few corporations, it is very difficult not to offer similar incentives to many companies. The result is a declining corporate tax base 66 C. Targeted Tax Incentives in Florida Desp Legislature has identified numerous industry clusters of interest and offers specific incentives to entice their growth. The main industry clusters of Florida according to Enterprise Florida are cleantech, life sciences, information technology, aviation and aerospace, logistics and distribution, defense and homeland security, as well as financial and professional services 67 Moreover, Florida has identified ma nufacturing, corporate headquarters, and emerging 64 Peter T. Calcagno and Frank Hefner, Distortionary Chapter 7 of Unleashing Cap italism, Pub. South Carolina Policy Council Education Foundation (2009), available at http://www.unleashingcapitalismsc.org/pdf/Chapter7.pdf 65 Id. 66 This is also because companies seek the same tax benefits that have previously been offered to their See David Brunori, State Tax Policy: A Political Perspective 3 rd Ed., The Urban Institute Press (2011). 67 Florid a Industry Clusters, Enterprise Florida, available at http://www.eflorida.com/ContentSubpageFull.aspx?id=52

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 22 of 31 identified industries 68 The Qualified Target Industry Tax Refund (QTI), the Qualified Defense and Space Co ntractor Tax Refund (QDSC), the Capital Investment Tax Credit (CITC), and the High Impact Performance Incentive Grant (HIPI) offer incentives ranging from $1,000 to $6,000 time equivalent job created or retained 69 Florida has als o identified seven special opportunity incentives and three workforce/infrastructure incentives for which tax credits are offered 70 hese incentives are long term economic prosperity within the state and should be eliminated in favor of a more meaningful system designed to enhance economic prosperity. Although this question is not asked nearly as often as it should be, it is central to the discussion more jobs but h igh skill, high quality jobs as well. Creating ten thousand low skill jobs is not as effective as creating ten thousand medium or high skill jobs. Even though the state of Florida does not levy a personal income tax, this difference in job skill manifests itself in a number of ways with regards to state revenue. Higher skills jobs usually involve a higher pay grade which property taxes, and on consumer goods, which th e state benefits from in terms of the sales tax. Therefore, creating more high skill jobs would be the ideal result of economic prosperity. 68 Id. 69 Incentives Enterprise Florida, available at http://www.eflorida.com/ContentSubpage.aspx?id=472 70 Id.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 23 of 31 Does decreasing the corporate tax rate have an impact on the quality of job created? In order to answer this key question, a basic empirical model was needed to determine the correlation between job quality and the state corporate tax rate. Although most l iterature is conducted on the state level, evaluating this question across metropolitan statistical areas (MSA) provided a more granular approach to the data. Using the job quality index developed by Dr. Jim Dewey of the University of Florida, a regressio n analysis was run using a cross section of 271 MSAs to evaluate the relation ship between the state corporate income tax rate and job quality. 71 Five key inputs were used to determine correlation the state corporate income tax rate for companies with $50 thousand dollars of taxable income and $100 thousand dollars of taxable income, the natural log of the ratio of total income to population of the MSA, the natural log of the MSA population in 2010, the unemployment rate, and the share of the population ove r the age of 65. 72 Although the natural log of the ratio of total income to population is an endogenous variable because of the causal link between this input and the independent variable, job skill, it was included as a control and was expected to be posit ively correlated. The natural log of the MSA population was selected because larger cities tend to have more skilled workers who are drawn to the area because of its 71 The job quality index was developed by Dr. Jim Dewey of the Universi ty of Florida used for calculating the Florida Price Level Index and other purposes and graciously supplied by him. 72 All figures quoted in the study were done using data from December 2010. See Tax Data, Tax Foundation, available at http://www.taxfoundation.org/taxdata/show/230.html (last updated February 16, 2012). See USA: Metropolitan Statistical Areas, City Population, available at http://www.citypopulation.de/USA Metro.html (last visited March 19, 2012). See Personal Income for Metropolitan Areas, 2010 U.S. Department of Commerce Bureau of Economic Analysis, available at http://www.bea.gov/newsreleases/regional/mpi/mpi_newsrelease.htm (la st updated August 9, 2011). See The 2012 Statistical Abstract Metropolitan Statistical Areas Population by Age : 2010 United States Census Burea u, available at http://www.census.gov/compendia/statab/cats/population.html (last visited April 6, 2012). See Metropolitan Area Employment and Unemployment January 2012 U.S. Department of Labor Bureau of Labor Statistics News Release (March 23, 2012), available at http://www.bls.gov/news.release/pdf/metro.pdf

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 24 of 31 numerous agglomeration effects. As with the natural log of the ratio of total income to po pulation, a positive correlation was anticipated. Lastly, the unemployment rate was included to control for the business cycle hitting differently across cities and because areas with high unemployment rates typically have a low skill labor force. The fi ndings of this study reflected that of previously discussed literature. Although most variables were significant, the state corporate tax rate was an insignificant determinant of high job quality. 73 Moreover, the regression indicated, but not significantly so, that the higher the corporate tax rate the greater the job skill level. 74 The results sugges t that a lower state corporate income tax rate is not associated with a greater job skill level across Metropolitan Statistical Areas and is contrary to current political rhetoric. If the act of creating high quality, high skill jobs is the ultimate policy goal of decreasing the state corpora te income tax rate, decreasing the state corporate income tax rate is unlikely to achieve this goal. It is important to also note the limitations of such a model. A definitive study on the effect of the state corporate income tax rate on job creation and more importantly, job quality would be very complex because of the difficulties in separating causation from correlation on this topic. A future review of this model may find it pertinent to review the effects of the state corporate income tax rate on jo b quality by also taking into account a segmented approach of the population. While this variation will likely yield the same output, it is possible that the state corporate tax rate has a greater correlation, even if not a statistically significant one, i n metropolitan statistical areas that are predominantly made up of 20 to 40 year olds as opposed to 73 The regression was ru n using twice and both results yielded the same output. The first regression used the corporate tax rate for a company whose taxable revenue was $100,000. The second regression used the corporate tax rate for company whose taxable revenue was $50,000. This was intentionally done to see if the corporate income tax rate affected companies of various sizes differently. 74 The regression was statistically significant using a 10 percent confidence interval, but was just under the mark for statistical significanc e using a standard 5 percent confidence interval. Refer to the appendix for the full regression output.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 25 of 31 40 to 60 year olds. Although this model does not allow us to definitely say that there is no correlation between the state corporate income tax rate and hig h quality jobs, it does suggest that the common assumptions towards decreasing the state corporate income tax rate will help generate more high skilled jobs may be inherently flawed. VI. POLICY RECOMMENDATION S FOR THE STATE OF FLORIDA Even if just for a determines where to locate their faci lities and/or services. While Pelliconi Florida President Tony Chapple said that while [located] 75 Regardless of the tax breaks offered by Oregon or California, the company would not have located their facilities there because of t he staggering distance between those states and Zephyrhills, Florida. on approach to increasing business operations within the state of Florida a nd pledge to decrease the corporate tax rate is the national r ecognition it has brought to the state Although operating costs is usually cited as one of the top concern s for companies, the corporate income tax, the only cost structure directly influenced by government decisions, is also important. John Boyd Jr., principal of the Boyd Co., has helped clients, such as Pepsico, JPMorgan Chase and Royal Caribbean, with their relocation efforts and 75 Pelliconi Group is an Italian bottle cap maker whose main customers are commercial bottlers located in Zephyrhills, Florida and Madison, Florida. See Mary Shanklin, s Low Corporate Taxes Not Its Biggest Draw Survey Finds Orlando Sentinel (March 2, 2011), available at http://articles.orlandosentinel.com/2011 03 02/business/os corporate tax rate 20110302_1_tax exemptions corporate taxes tax incentives

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 26 of 31 ost 76 friendly environment only appeals to certain industries. Manufacturers are going to be more concerned about the costs of labo r, real estate, and taxes than service or knowledge based companies which will rely more heavily on education levels and human capital. While the former may be directly influenced by promises of tax cuts, the latter will be concerned with the effect of the se cuts on education and the human talent of a state, both of which are directly impacted by government funded public services. I t is also important to weigh the costs of decreasing the corporate tax rate in Florida against factors other than the perception of Florida as a business friendly state The Orlando Sentinel reports that the current 5 .5 percent corporate tax generates approximately two billion dollars annually in revenue for the state. 77 This tax is used to fund education and other public services accompanied by a decrease in spending or increase in other taxes during the same fiscal period. F urther cuts to public coupled with t he a two billion dollar budgetary shortfall would cripple public and Governor Rick Scott 78 in the nation it would not be the most ef further. 76 Id. 77 Mary Shanklin, s Low Corporate Taxes Not Its Biggest Draw Survey Finds Orlando Sentinel (March 2, 2011), available at http://articles.orlandosentinel.com/2011 03 02/business/os corporate tax rate 20110302_1_tax exemptions corporate taxes tax incentives 78 Id.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 27 of 31 Michael Mazerov summarizes these concerns and states that w hile proposing corporate tax cuts is an easy and perhaps politically attractive thing to do these proposals represent a distraction rather than a solution. 79 If the state of Florida is looking for long term economic growth, investing in public services, such as education, transportation, and infrastructure, is a more cost effective policy goal g iven the current economic climate hese services play a critical role in underpin ning private sector growth and [as previously discussed] their iveness for private investment. Supporting the m arket with appropriate public investments will be more likely to lead to long term prosperity than will enacting small changes in economic incentives via risky corporate tax cuts 80 As such, allocating further efforts to decreasing or eliminating the corpo rate income tax rate in the next five years would be resources. The Florida Legislature and political leadership should shift their focus to investing in areas that offer sustainable gr owth such as infrastructure, education, and related public services. Until the economy readily improves and tax incentives or tax cuts are proven to be have a direct correlation with economic prosperity, it is important to protect all current sources of re venue for the state. Market forces should be the ultimate guiding factor in where and when corporations chose to locate. At 5.5 percent, Florida currently sits below the national average and remains attractive to businesses and individuals who are specific ally seeking a low tax shelter. VI I CONCLUSION 79 See Michael Mazerov, Cutting State Corporate Income Taxes is Unlikely to Create Many Jobs, Center on Budget and Policy Priorities (September 14, 2010), available at http://www.cbpp.org/files/9 14 10sfp.pdf 80 Id.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 28 of 31 Distorting normal market forces and creating a deadweight economic loss to society is never an ideal policy goal. However, decreasing state revenue in the anticipation that the money will later be replenished is not a sound policy option either. This is th e dilemma and the conundrum of the state income tax society dislikes taxes but we are unwilling to hinge the The corpo rate income tax represents a significantly smaller percentage of F budget than it did ten years ago and this trend can be viewed in other states across the nation. At face value, this would indicate that the revenue source could be foregone and this might be true given a stronger economic climate; however, further reducing the state revenue will only force deep cuts in public services in the short run while the public wait s for the multiplier effect to transpire. Until economic data clearly indicates a one percent decrease in the state corporate income tax r ate correlates to a significant percentage increase in economic prosperity, Florida should desist from pursuing this policy further. The data also indicates that the state corporate income tax represents a smaller proportion of corporate expenditures to day than it did ten years ago even though corporate profits have steadily increased during the same time. This suggests that the state corporate tax rate does not ll evaluated carefully by companies. It is unlikely that the state corporate income tax rate has as much of an influence as the federal corporate income tax rate and a number of other important site selection factors, such as proximity to suppliers and cus tomers, transportation, workforce skill, and cost of labor, has further diminished the relative importance of the state corporate income tax rate.

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 29 of 31 If the state of Florida chooses to lower or eliminate the corporate income tax rate in an attempt to spur e conomic prosperity, the question remains who will bear the brunt of this decision citizens in the form of higher property or sales taxes, public employees whose salaries and benefits will be further reduced, or the state as a whole if the value of public services decreases due to a lack of funding?

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 30 of 31 VIII. Appendix Regression Model Notations: L P op2010 is the natural log of the MSA populations in 2010 C represents the state corporate income tax rate is the natural log of the ratio of total income to population of the MSA is the unemployed population divided by the civilian labor force of the MSA (the unemployment rate) is the share of the population over the age of 65 Regression Data Output Using the Co rporate Tax Rate for a Company with Taxable Earnings of $100,000 Dollars

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Increasing Business Operations in Florida: Is Lowering the Corporate Tax Rate an Effective Policy Tool? Moore, Mikaela R. Page 31 of 31 Regression Data Output Using the Corporate Tax Rate for a Company with Taxable Earnings of $50,000 Dollars