Laws of Attraction

Gov. Rick Scott’s proposed budget to Florida legislators this spring would reduce Florida’s 5.5 percent corporate income tax to 3 percent this year and again from 3 percent to 2.5 percent in 2012-13, eliminating the tax over a period of seven years, in order to sweeten the pot for companies thinking about relocating.

This makes Scott a maverick among governors, since many other states are raising corporate income taxes (Illinois is considering a 75 percent hike) to balance their budgets. If he succeeds, Florida—already a state with one of the lowest corporate taxes (see chart)—will become one of only a handful of states that has a zero corporate income tax.

This has plenty of legislators and public entities shivering. The corporate income tax is the state’s largest source of general revenue after the sales tax and is used to fund services such as education, transportation and healthcare. If eliminated, the loss of revenue would total $459 million this year and another $1 billion next year.

But whether Scott’s proposal passes or not, what do the experts think? We asked a relocation expert and an economist to weigh in on whether corporate tax cuts really work to attract outside companies.

John Rhodes, senior principal of the national relocation consulting firm, Moran, Stahl and Boyer, based in Lakewood Ranch, says reducing taxes is always an incentive for companies. “It’s something that positively influences a business’s decision toward a particular destination. Companies are working hard to make a profit. They have to be in a place where they can retain earnings to grow.” Raising corporate income taxes to balance budgets is “extremely unattractive” to companies, he says.

Rhodes thinks that relocating companies could more than make up for the lost $1.5 billion in corporate income taxes, since new companies bring jobs and income and pay property and sales taxes. “Companies spend $50,000 to $75,000 per employee when they’re relocating their headquarters, and they will invest in their headquartered communities,” says Rhodes. “Cash or kind, they will make up the difference in [loss of revenue to] education and other services.”

Dr. Sean Snaith, director of the University of Central Florida’s Institute for Economic Competitiveness, disagrees. “Most businesses are small businesses, so other things are more important,” he says. “I think [streamlining] the regulatory process that a business has to go through would have a greater effect. Make it easier for the small businesses to navigate the labyrinth of regulatory processes like permitting.”

Florida, he predicts, will not see immediate results from any corporate income tax cuts. “By itself, it’s not enough of a stimulus,” he says. And it could be harmful. “The taxes we are going to cut are too big, and there is not enough of the pie left for the economy to absorb them.” If there is a positive effect, he adds, it’s that this kind of tax cutting sends a larger message out to the rest of the country “that Florida welcomes and wants to do business.”