Business taxes and economic growth

North Carolina doesn’t yet have a state budget for 2011-12, but we do know one element that will likely be included: The governor and the House and Senate leaders are in favor of lowering the state’s corporate income tax rate. N.C. State University economist Mike Walden explains what this could do for the economy.

“I think supporters … think this will increase economic activity in the state. And I think they are actually on firm ground, based on a new study — brand new study — we have from the Federal Reserve. Economists at the Federal Reserve actually modeled the economy of all 50 states, and they tried to ascertain the relationship between economic growth in each of the 50 states and the various kinds of taxes that businesses pay.

“And they found that there was a significant relationship. They did find that lowering business taxes, like the corporate income tax, actually would increase business investment, increase production as well as income in that state.

“To give you some numbers for North Carolina, what they found was a 1 percent drop in the rate of business taxation would increase economic production in the state by 0.5 percent.

“Now one downside of this has to do with public revenue. The increase in output would likely not be enough to overcome the reduction in revenue to the state caused by reducing the corporate income tax or other kinds of business tax rates. So there would likely still need to be an adjustment on the spending side.”

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