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Tuesday, October 20, 2020

Businesses Are Staring At The Possibility Of Both Federal & State Corporate Tax Hikes In 2021

Aside from the Supreme Court and other judicial appointments, among the most significant achievements of the Trump administration thus far is the corporate tax rate cut from 35% to 21%, which made it so the U.S. no longer has the highest corporate income tax in the developed world. Former Vice President Joe Biden has made it clear he wants to undo that achievement if he’s victorious in November. 

In his October 15 town hall with George Stephanopolous, Joe Biden reiterated that he wants to raise the federal corporate income tax by more than 33%, taking the rate from 21% to 28%. At 28%, Biden’s proposal would put the U.S. corporate rate back above the European average. Biden’s proposal would also set the U.S. corporate tax at a higher level than that of communist China.

During the ABC town hall, Biden told Stephanopolous that raising the corporate rate would make companies less inclined to relocate overseas. However, Biden has it backwards there. The higher corporate rate levied during the Obama administration was among the chief factors causing corporate inversions in which businesses relocated headquarters abroad. That was the reasoning behind President Barack Obama’s proposal to cut the corporate income tax rate, albeit as part of a package that still resulted in a trillion dollar net tax hike and was thus dead on arrival in a GOP-run Congress. 

“Corporations were inverting in droves in the decade leading up to the Tax Cuts and Jobs Act because we had the highest corporate income tax rate in the first world, and other developed nations had rates about half ours,” said Ryan Ellis, a federal tax lobbyist who is also an IRS Enrolled Agent with his own tax prep firm. “Since we brought our rate down closer to the middle of the pack, inversions have all but disappeared. If our corporate income tax rate rises as significantly as Biden-Harris wants, we can expect inversions to once again tick up.”

Biden’s proposed corporate tax hike, which he says will raise $1 trillion dollars more than the current code collects, is unlikely to become law if Mitch McConnell is still Senate Majority Leader next year. If Democrats win the House, Senate, and White House, a corporate tax hike looks like a sure thing. 

Unified Democratic control of the White House and Congress could also mean back to back corporate tax hikes for employers located in states where an increase in corporate income tax is also a real possibility in 2021. 

Corporate Tax Double Whammy Possible In Both Blue & Red States

Polls show a tight contest in North Carolina when it comes to the presidential and U.S. Senate races. In the gubernatorial contest, however, polling shows Governor Roy Cooper (D) with a sizable lead over his Republican opponent, Lt. Governor Dan Forest. 

While Joe Biden is running on a plan to undo federal corporate tax relief, Governor Cooper has been critical of what he calls the “tax breaks for corporations” enacted by the Republican controlled General Assembly and his predecessor, former Governor Pat McCrory (R). As recently as 2013, the combined federal and state corporate tax rate paid by businesses in North Carolina was 41.9%. Today that combined corporate rate is 23.5%. 

North Carolina’s state corporate tax rate is 2.5% today, the lowest rate among the states that levy a corporate income tax. It was only seven years ago that North Carolina had the highest corporate tax rate in the southeast at 6.9%. Were Democrats to take control of the North Carolina General Assembly and undo the tax cuts approve by North Carolina Republicans, which began in 2013, it would result in a 176% state corporate tax increase, which makes Biden’s proposed 33% corporate rate hike look paltry by comparison.

“Republicans in North Carolina cut taxes for people and businesses and avoided reckless spending – all while making nation-leading investments in schools and passing some of the highest teacher pay raises in the country,” said North Carolina Senate President Phil Berger (R). “Under the Biden/Cooper tax hike plan, the policies that created a boom decade in North Carolina would be reversed, slowing the economy and losing jobs. Our citizens can’t afford Biden and Cooper.” 

If both Biden and Cooper are elected this November, and Democrats also take control of Congress and the North Carolina General Assembly, Democrats will have the ability to repeal the rate-reducing tax reform that was passed by the GOP at the federal and state levels. Were that to occur, it would mean that the combined corporate tax rate paid by North Carolina businesses would rise by more than 78%. 

In criticizing the corporate tax relief enacted by Republicans, Governor Cooper has said he prefers “more investment in education instead of corporate tax cuts.” Yet, as the Raleigh-based Civitas Institute has highlighted, there are many examples of Governor Cooper supporting corporate tax breaks that are targeted, not broad-based, and selectively awarded. 

“Governor Cooper enjoys touting North Carolina’s welcoming and vibrant business environment, yet regularly calls for tax policies that would atrophy the progress fiscal conservatives have made,” said the Civitas Institute’s Brooke Medina “It’s the epitome of cognitive dissonance and makes one wonder whether he understands that the economic policies he opposes are the very thing standing between a thriving North Carolina economy and a mediocre one.”

When it comes to corporate taxation, “Cooper doesn’t get it,” notes Mitch Kokai, senior political analyst at the John Locke Foundation, a Raleigh-based think tank. “He has labeled general rate cuts as giveaways while touting the use of targeted tax breaks instead. During his first year in the Executive Mansion, the state nearly tripled its commitment to targeted incentives. Cooper’s team committed up to $185 million in giveaways to 54 favored companies.” 

North Carolina isn’t the only state where employers face the prospect of higher federal and state corporate taxes in 2021 depending upon the 2020 election outcome. Wyoming is currently one of two states that does not levy a corporate income tax (the other is South Dakota), but legislation to change that has been introduced the past two sessions of the state legislature.  

A bill to impose a 6% corporate tax was approved by the Republican-run Wyoming House of Representatives in 2019, but the state’s Senate did not vote on the measure. Many suspect that Cowboy State corporate tax advocates will make another push in 2021. What will be different from the previous attempts is that Wyoming lawmakers might be facing the prospect of seeking to impose a state corporate tax at the same time that federal lawmakers are voting to saddle Wyoming employers with a 33% federal corporate rate hike. 

The results from Wyoming’s August primary, however, may have a chilling effect on efforts to enact a state income tax in 2021. A number of legislators who voted for the corporate tax bill — including the Representative Tyler Lindholm (R-Sundance), the Wyoming House Majority Whip — were defeated in their primaries by candidates opposed to installing a corporate or personal income tax. 

These Republican primary results “will make a big difference on the mentality of members of the revenue committee if we’re going to really present some suggestions or if it’s really not worth our time,” House Revenue Committee chairman Dan Zwonitzer told the Casper-Tribune. “If there are five more people who pledged not to raise taxes, then there’s no reason to waste time bringing these bills forward.”

If these primary losses end up killing the chances for passage of a Wyoming corporate income tax in 2021, Wyoming businesses will no longer have to worry about their combined corporate tax rate rising from 21% to 34%, as would occur if Biden’s proposed corporate tax hike and the state corporate tax proposed Wyoming lawmakers were both enacted.

Illinois is another state where a corporate tax hike could be a possibility in 2021. That depends on what happens with the measure on the November ballot that would green light a progressive income tax hike. Governor J.B. Pritzker (D), the ballot measure’s most prominent backer, warned recently that other state tax hikes, including a 20% income tax hike, will be pushed in 2021 if voters reject the graduated income tax measure on the 2020 ballot. So the choice before Illinois residents is higher taxes, or higher taxes. If a personal income tax hike is on the table in Springfield in 2021, it’s likely that a corporate tax hike will be as well.  

Though Joe Biden and Roy Cooper maintain leads in most polls, former Florida gubernatorial candidate Andrew Gillum provides a cautionary tale against complacency. Like Biden this year, in 2018 Andrew Gillum campaigned on a large corporate tax increase, a 40% hike in Gillum’s case. Despite leading in nearly every poll leading up to the election, Gillum was upset by Ron DeSantis (R). 

Even if Governor Cooper is victorious on Election Day, North Carolinians hoping to avoid the personal and corporate tax hikes sought by progressives won’t have to worry about that if Republicans maintain control of the North Carolina General Assembly this November. The North Carolina Legislature is currently led by Senate President Phil Berger (R) and Speaker Tim Moore (R), two legislative leaders who have made clear that tax increases are a non-starter. 

Likewise, federal tax increases are a non-starter for Mitch McConnell and his caucus. Even if both Biden and Cooper are elected this November, tax hikes are dead on arrival in both Washington and Raleigh so long as Republicans maintain control of the U.S. Senate and North Carolina General Assembly 

It’s less than ideal for businesses, many of whom are in recovery mode, to have a President and Governor who want to raise the combined federal and state corporate tax rate as much as Joe Biden, Roy Cooper, and lawmakers in their party would like to. Fortunately for taxpayers hoping to avoid such rate hikes, even if Biden and Cooper win November, as polling indicates is the most likely outcome, the choices voters make down ballot can provide a legislative firewall against higher taxes in 2021 and 2022.

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