Matt Rourke/AP Photo
Pennsylvania Gov. Josh Shapiro delivers his budget address for the 2024-2025 fiscal year to a joint session of the state House and Senate at the state Capitol in Harrisburg, February 6, 2024.
The presidential race is unpredictable, but the legislative conversation in 2025 for the eventual winner is actually already determined. Nearly all of the Trump tax cuts affecting individual filers expire at the end of that year, as well as enhanced subsidies for Affordable Care Act exchanges. As I was told back in April, the near-term stakes of this election will ultimately come down to whether Elon Musk pays more or less on his taxes in 2026.
While most of the expiring measures involve individual rates, taxes on corporations will likely also be on the table. The current corporate rate was already slashed in the Trump tax cuts, from 35 to 21 percent. Ten large companies have paid $67 billion less in taxes thanks to that policy change. Donald Trump has alternatively told CEOs that he wants to cut corporate taxes even further to 20 percent; he told Bloomberg that they could go down to 15 percent. (Project 2025 splits the difference, at 18 percent.) Before leaving the race, Joe Biden proposed a 28 percent corporate rate, and Kamala Harris proposed 35 percent in her failed 2020 presidential campaign. I’d expect her to go back to the Biden figure, but that still represents a serious split between the parties, part of as much as a $6 trillion difference over the next decade.
The corporate tax debate has an antecedent at the state level, involving one of the more likely candidates for vice president. Josh Shapiro, the governor of Pennsylvania, is trying to accelerate an already scheduled cut in the Keystone State’s corporate tax rate from 9.9 percent to 4.9 percent. At an event with Treasury Secretary Janet Yellen yesterday, Shapiro said he was “working aggressively” to cut those tax rates on business. “We needed to have a more advantageous tax environment for our businesses, and it was one component of an overall strategy in order to grow jobs and create more economic opportunity in Pennsylvania.”
Embedded in this answer is an assumption that low corporate tax rates are an essential part of economic growth and job creation. But studies don’t really show that; the race to the bottom on taxes doesn’t necessarily drive economic development, particularly as building a talented, highly educated workforce and a good environment to live in has been known to do the job. Given the fact that Shapiro’s comments also often come out of the mouths of business leaders when demanding that federal corporate taxes stay low, this position makes Shapiro an odd fit on the Democratic ticket, if he’s given the nod.
Pennsylvania’s corporate income taxes, as of 2022, were indeed among the highest in the nation. A bipartisan push to lower those rates led to a compromise measure, which dropped the rate from 9.99 percent to 8.99 percent at the start of 2023, and a half-point each additional year until it gets to 4.99 percent by 2031. That ending level would make Pennsylvania one of only 12 states with corporate rates at or below 5 percent. (Four states use gross receipts taxes, and only South Dakota and Wyoming levy no corporate income taxes.)
Shapiro is trying to accelerate an already scheduled cut in the Keystone State’s corporate tax rate from 9.9 percent to 4.9 percent.
But Shapiro doesn’t want to wait until 2031. He said publicly last year that he wanted to get to the 4.99 percent figure by 2026 instead. “I am competitive as hell, so I don’t want to lose out to any other states,” he told attendees at an event put on by the Chamber of Commerce for Greater Philadelphia.
The state House passed just such an acceleration last October, but it didn’t make the final budget, and while this year’s budget included benefits for corporations, including changes allowing companies to carry forward more losses from previous years to lower future taxes, the corporate rate schedule remains the same. That obviously isn’t stopping Shapiro from trying, and he’s making a specific argument about it: Lowering corporate tax rates boosts economic growth.
It doesn’t look like that’s what happened at the federal level. A recent Brookings paper looked at corporate investment before and after the Trump tax cuts, with their 40 percent reduction in the corporate rate, was implemented. There was practically no change in the investment picture.
What about state taxes? A series of papers from Owen Zidar and Juan Carlos Suárez Serrato find that, while the number of local firms do tend to increase when state corporate taxes are cut, a substantial portion of the benefits (roughly half) go to the wealthy owners of the businesses that get lower taxes. Often states compensate for lower business taxes with higher taxes elsewhere, the researchers found, which usually hit lower-income workers the hardest. That is perhaps why one paper shows a link between low corporate tax rates in the states and higher income inequality.
Zidar and Serrato also explain that special tax deductions for economic development, a $90 billion-a-year business in the United States that includes tax abatements for relocation, exemptions from paying certain taxes, and more, account for far more of the variation in revenue to states than the nominal corporate tax rate. In a separate paper, Zidar and Cailin Slattery looked at the impact of these economic development subsidies, and found little evidence that they spur increases in broader economic growth in a city or state. These special deals invite corruption as well. And businesses that chase tax breaks and subsidies also tend to be less productive, with overall reductions in economic growth throughout the country. These sentiments are broadly shared among experts.
If you look at the state with the highest corporate tax rate, it happens to be Minnesota, at 9.8 percent. (Ironically, Gov. Tim Walz is currently also seen as one of the leading candidates for the vice-presidential nomination.) Yet Minnesota often ranks high in “top states for business” surveys, for reasons that have little to do with tax policy. Minnesota’s solid infrastructure, high quality of life, above-average education rates of its workforce, and relatively low cost of living are major factors in this calculation. In other words, there are plenty of ways to help create or maintain an attractive business climate, and it often starts with whether workers would want to live there. Tax cuts constrain the ability of states to make the investments in infrastructure, education, health care, and other quality-of-life issues.
Gov. Shapiro certainly isn’t saying that only lower corporate tax rates can bring economic growth; he touts plenty of examples of economic expansion in Pennsylvania on his gubernatorial website, a few of which didn’t involve any economic development grants at all. But a good deal of research has gone into the “throw tax cuts at businesses” model of economic development, and it hasn’t yielded a fully positive picture.
In a statement, Shapiro spokesperson Manuel Bonder told the Prospect, “Since day one, Governor Shapiro and his Administration have worked to make Pennsylvania more competitive with other states and create good-paying jobs for Pennsylvania workers by speeding up the Commonwealth’s permitting processes, implementing the first statewide economic development strategy in nearly 20 years, and cutting taxes for businesses and working families.” Bonder did add that the $2 billion in private-sector investments he’s attracted are in part also due to state investments in “site development, main streets, and agricultural innovation.”
To be sure, state and federal taxes are different, both in terms of rates and the rules over deductions and credits. But one concern is that the same arguments Shapiro is making about needing low corporate taxes are already prevalent in the federal fight. The CEO of Procter & Gamble told The Wall Street Journal last month that increasing corporate taxes would “put U.S. companies in an uncompetitive situation,” and that it would dampen U.S. investment. That CEO, Jon Moeller, is the tax policy lead for the Business Roundtable, a coalition of 300 chief executives that throws its weight around on corporate policy.
Conservatives are not entirely unified on corporate taxes; there are even a few paying lip service to entertaining a higher rate. Meanwhile, the Biden administration has delivered a strong message that corporate taxes need to be higher, and the Harris campaign has shown no indication of breaking with that. In a campaign speech this week in Atlanta, Harris attacked the Trump campaign for wanting “to give tax breaks to billionaires and big corporations.”
Some critics argue that bringing someone onto the ticket who has been stumping for corporate tax cuts for the past couple of years might muddle that message. “Next year a Democratic administration has an opportunity to finally turn the page on our trickle-down tax code,” said Lindsay Owens, executive director of Groundwork Collaborative. Any vice president on the Democratic ticket should commit to not a penny more in tax breaks for the wealthy and corporations.”
Bonder, Gov. Shapiro’s spokesperson, responded to questions from the Prospect about federal corporate taxes: “While the Governor has been clear about his commitment to making Pennsylvania’s corporate net income tax more competitive with other states, he recognizes that the situation at the federal level is very different—and federal tax policy going forward will be the responsibility of Vice President Harris and her team. Governor Shapiro strongly supports Vice President Harris and her vision to build a stronger economy for American families—and he will continue rallying Pennsylvanians across the Commonwealth to support her campaign.”
Regardless of the peculiar circumstances of Shapiro, the assumption that the way to do economic development is to buy off corporations in a race to the bottom that undercuts competing states ought to be at least updated, if not altogether tossed.
