A Promising Idea for Corporate Income Tax Reform

by Reihan Salam

Josh Barro calls for a very smart corporate tax reform that would make life much easier for U.S. firms, particularly those that operate across state lines:

Instead of focusing on lowering the federal rate, Congress should broaden the federal corporate income tax base and then forbid states and localities to tax corporate income — replacing their foregone revenues with an unrestricted federal block grant.

As Josh explains, this proposal would reduce revenue volatility for states and shift tax competition in more constructive directions:

Some conservatives might object that interstate tax competition is a good thing, and that the federal government would undermine it by effectively levying a uniform state corporate income tax. But in this instance, interstate competition has mostly led to the granting of special favors and the narrowing of tax bases — not a desirable form of competition. States would continue to compete and differentiate themselves on major taxes, especially those on personal income, sales and property.

This is an issue I feel very strongly about. In the name of the “negative Commerce Clause,” i.e., the notion that Congress has the right and the duty to strengthen America’s national marketplace, I wish we’d see legislation against the granting of special favors and privileges to individual sectors and firms, which badly distort economic decision-making. State corporate tax systems are rife with these abuses.

Abolishing state and local corporate income tax looks like a bold step, but it is preferable to simply reforming the federal corporate income tax. My proposal would achieve all the same goals as a revenue-neutral federal corporate tax reform, while also reducing compliance costs and doing more to reduce the economic burden of corporate taxation. And with a consensus in Washington that corporate tax reform is needed, abolishing these taxes may be more feasible than ever.

Depressingly, I think that at least some self-described federalists will oppose this approach, despite the fact that it is entirely compatible with other measures that would strengthen competitive federalism.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.