U.S. Should Reduce Tax Rates Across the Board

Today, the Tax Foundation published the 2017 International Tax Competitiveness Index, which finds that the United States ranks 30^th out of 35 OECD countries in tax competitiveness and tax neutrality. Specifically, the U.S. ranks 35^th in corporate taxes. Given that the U.S. has not reduced its federal corporate tax rate from 35% since the early 1990s, Congress should lower this rate as soon as possible to encourage additional economic activity.

The United States also ranks 29^th in property taxes, 25^th in individual taxes, and 33^rd in international tax rules. Although the U.S. does rank 4^th in consumption taxes, its unnecessarily high corporate rate harms its overall ranking. The combined U.S. corporate tax rate (including state and local corporate taxes) is 39%, which is significantly higher than the OECD average of 25%.

Congress and state and local policymakers should address this issue by reducing corporate rates and simplifying the U.S. tax code. The Index says that a simple, competitive, and neutral tax code contains low marginal tax rates with few economic distortions and “promotes sustainable economic growth and investment while raising sufficient revenue for government priorities.” To avoid losing businesses and capital to countries with lower tax rates, the U.S. should reduce tax rates across the board.

Facts & Figures Regarding Maryland’s Tax Rates

On February 29, 2016, the Tax Foundation released a new dataset called “Facts & Figures 2016: How Does Your State Compare?” The dataset is a one-stop-shop for much of the state-level data on tax rates and spending that the Tax Foundation collects and releases over the course of the year.

Here are some interesting facts about Maryland’s tax rates:

• Maryland ranks 7^th highest in the United States with a state and local tax burden of 10.9% of income. That means that the average Maryland resident pays $5,920 in state and local taxes each year. (See FSF President Randolph May’s January 2016 blog for more on this.)

• Maryland ranks 16^th highest in the U.S. with a 6% state sales tax rate. However, Maryland localities do not charge a sales tax, so combining state and local sales tax rates, Maryland ranks 37^th in the country.

• Although Maryland has a flat corporate income tax rate, it is one of the highest in the country at 8.25%. (Because some states apply a progressive corporate tax rate, there are no rankings for these.)

• Despite low gas prices recently, they could be lower. Maryland adds 32.60 cents in taxes and fees to every gallon purchased within the state. That is the 13^th highest amount in the U.S.

• Maryland imposes relatively high “sin” taxes, which are taxes on items that are considered more or less harmful. Maryland’s $2.00 excise tax rate per 20-pack of cigarettes is the 11^th highest in the country, while its $4.05 excise tax rate per gallon of spirits is 31^st highest in the country. Maryland’s wine tax rate is $1.35 per gallon, which ranks 12^th highest in the country, and its beer tax rate is 9^th in the country at $0.49 per gallon.

• Lastly, Maryland’s cell phone tax rate is a whopping 12.67%. This rate ranks Maryland 14^th highest in the U.S.

During the first year of his term, Governor Larry Hogan did a commendable job of beginning to address unnecessary barriers to economic growth in Maryland, including by reducing over 100 state fees which will save Marylanders an estimated $51 million over five years. Additionally, Governor Hogan’s proposed budget for fiscal year 2017 includes an estimated tax savings of $480 million over the next five years. However, there still is a lot of work to be done towards lowering tax rates, reducing regulatory barriers, and creating a more efficient state government.

Also, see the January 2016 Perspectives from FSF Scholars by FSF President Randolph May and me entitled “Achieving Efficient Government and Regulatory Reform in Maryland.”

U.S. Tax Code Is Hurting the Country's Global Competiveness

On September 28 2015, the Tax Foundation released its 2015 International Tax Competitiveness Index (ITCI) and the United States ranks 32^nd out of 34 OECD countries. The ITCI ranks countries based on policies which limit taxation of businesses and investment and seek to raise the most revenue with the fewest economic distortions.

The ITCI says the following regarding the United States’ low score:

There are three main drivers behind the U.S.’s low score. First, it has the highest corporate income tax rate in the OECD at 39 percent (combined marginal federal and state rates). Second, it is one of the few countries in the OECD that does not have a territorial tax system, which would exempt foreign profits earned by domestic corporations from domestic taxation. Finally, the United States loses points for having a relatively high, progressive individual income tax (combined top rate of 48.6 percent) that taxes both dividends and capital gains, albeit at a reduced rate.

The United States was unable to improve from its 2014 ITIC score. This is likely because the U.S. tax code has remained fairly unchanged since the Tax Reform Act of 1986, when Congress reduced the top marginal corporate income tax rate from 46 percent to 34 percent. Since then, many OECD countries have lowered their own rates, reducing the OECD average corporate tax rates from 47.5 percent in the early 1980s to around 25 percent today. The U.S. government actually raised the top marginal corporate rate to 35 percent in 1993, giving the U.S. the highest corporate income tax rate in the industrialized world.

It is important that Congress use the ITCI to understand and address why many U.S. companies have moved their headquarters abroad. Job creation is essential for a growing economy, and lower tax rates and a competitive tax code would allow for entrepreneurs and businesses to invest in new opportunities. Lowering U.S. tax rates, especially the corporate rate, would not only lead to more jobs and higher incomes. Consumers also would pay lower prices as the U.S. expands trade around the globe.