You have to admit, when the StarTribune refers to the state corporate income tax as "a stinker", it's a good day for the people who support lower taxes.

[W]ould the corporate tax cut stimulate the economy in the way Pawlenty predicts? Or would it simply drain away revenues that already are shrinking?

Economists and business leaders are mixed on whether lowered business taxes would prove a jump-starter. But they are virtually unanimous in their assessment that the corporate income tax is, to put it bluntly, a stinker.

The discussion though always turns to how the government makes up the money:

[F]or all its problems, the corporate business tax has been a boon to state coffers. The tax yielded only $588 million five years ago and now hauls in $1.02 billion a year.

"Given our economic situation, if we're going to get rid of that, we have to think of what replaces it," said Senate Taxes Committee Chairman Tom Bakk, DFL-Cook. "Given where this state is right now, we can't afford to turn our backs on a billion dollars of revenue unless it's offset somewhere else."

But the forecast in November was not for this level of income. Only $597 million is expected in FY 2010 (to start July 1 2009) and $809 million in FY 2011, and barely rising above $900 million by FY 2013. Compared to $5 billion or more in deficits for the next biennium and the one thereafter (we'd expect), this is not that much.

Tax competition between the states (illustrated by this chart from the STrib) is costing Minnesota jobs and corporate tax revenues. Brent Bartsch writes that North Dakota is already considering cuts in the corporate rate. This kind of tax competition is more known in Europe (thus calls for "tax harmonization", which is cartel behavior by governments) but also can happen between states. �When other states are scrambling to hold down deficits, however, you can bet on nobody else following your lead on corporate taxes, at least for awhile. �That would make Pawlenty's play on taxes for small businesses and corporations potentially a winner.

Labels: economics, Minnesota, Pawlenty, taxes