Will tax cuts attract businesses to Arizona?

The bill sponsors' rationale is that the tax cuts will attract more businesses to Arizona - thereby bringing more tax revenue into the state's coffers and creating jobs to replace at least some of the 300,000 lost since 2008.

Will it work? 

On the surface, that sounds like a fine plan.  Arthur Laffer taught us that there is some tax rate that is so high as to disincentivize work (and, thus, lowering the tax rate will actually bring in more tax revenue).  But, I'm not sure that lowering Arizona's corporate income tax rate from 6.9 percent to 4.9 percent at a future date qualifies. Arizona Republic columnist, Bob Robb is also skeptical, commenting:  "Uncertainty is the enemy of investment. No one is going to be enticed by the promise of future tax cuts when state finances are in such disarray."

Compared to the 45 other states that levy a tax on corporate income, Arizona's (old) rate of 6.9 percent put the state 26th - just on the low end of the middle.  So Arizona's tax rate was not relatively high, yet the state still wasn't attracting as many of the kind of employers we would like.  Indeed, the jury is still out as to how much a state's corporate tax rate really matters - business leaders almost always list other factors above tax rates as the most important location considerations.

All else equal, of course tax rates matter - if a business were looking at two states with equally-good education systems, equally-good infrastructure, equally-well trained workforces, and equally-good qualities of life, of course the business would choose the state with the lower tax rate.

But "all else" is almost never equal, and it takes money to pay for high-quality education systems, fit-for-purpose infrastructure, cutting-edge workforce development, and quality-of-life improvements.  That money has to come from somewhere.

How do we create jobs?

I actually began this blog post with the intention of writing about how jobs are created.  Because ultimately, that's what this is all about - jobs.  Ideally, they'll be high-paying jobs in long-term sustainable industries (not highly cyclical, relatively low-paying industries like real estate).  But the ultimate goal behind attracting businesses to Arizona is the workers they'll employ.

So, how does a government go about "creating" jobs?  Clearly, if I (or anyone else) knew the definitive answer to that question, we'd be doing it.  But here are some darn-good ideas, from former Intel chief Andy Grove:

• Government should invest in cutting-edge companies and the infrastructure to support them.  "Scaling isn't easy. The investments required are much higher than in the invention phase. And funds need to be committed early, when not much is known about the potential market."
• Modify free-market economics to become job-centric economics.  "Evidence stares at us from the performance of several Asian countries in the past few decades. These countries seem to understand that job creation must be the No. 1 objective of state economic policy."
• Help American companies develop a U.S. strategy.  "We got to our current state as a consequence of many of us taking actions focused on our own companies' next milestones. An example: Five years ago a friend joined a large VC firm as a partner. His responsibility was to make sure that all the startups they funded had a "China strategy," meaning a plan to move what jobs they could to China. . . VCs should have a partner in charge of every startup's ‘U.S. strategy.'"

Here's a suggestion for Arizona's policymakers: Step 1, get the state's fiscal house in order.  That means balancing the budget (and stop wasting time/resources on loony ideas like getting rid of AHCCCS).  If you can do it with tax cuts, by all means have at it.  (I'm doubtful.)  Step 2, think about the most cost-effective ways that you can foster the development of sustainable, productive industries in Arizona that employ lots of highly-paid workers over the long term, across business cycles.  That's the path to a more prosperous Arizona.