The Hidden Threat of Tax Cuts to Equitable Economic Development

Posted by Marjorie Kelly on March 30, 2017

Although the Trump administration’s recent budget proposal offers only a look at expenses, with no numbers on revenue, it won’t be long before massive cuts to corporate taxes are on the agenda, as Trump has promised. Before the noise machine ramps up on that issue, it’s an apt time to stop and consider the unintended consequences such tax breaks could have. The hidden danger in broad cuts to the corporate tax rate is this: these cuts would blunt the effectiveness of key policies designed to support communities and an inclusive economy.

Consider the Low-Income Housing Tax Credit (LIHTC). It was created under Ronald Reagan, and the Department of Housing and Urban Development has called it “the most important resource for creating affordable housing” in the U.S. today. The program generates nearly $8 billion annually in much-needed affordable housing across the country, without direct government expenditure. Instead, tax credits are allocated to developers building housing for lower-income Americans, and these credits are passed on to investors who provide billions of dollars for inclusive housing development. What happens when the corporate tax rate is slashed? The value of those credits evaporates. Why should investors chase credits to reduce their tax bill when Trump will cut it for them? An article in Next City indicated that affordable housing developers are already feeling the pinch, with LIHTC credit values falling even as the tax cuts remain vague proposals.

Other key programs will face similar fates. The New Markets Tax Credit (NMTC) uses a similar mechanism to move billions of dollars of investment into struggling communities—generating, according to the Treasury’s CDFI Fund, $8 of private investment for every $1 supplied by the government. There is a bipartisan effort underway to make the NMTC permanent; but even if that effort succeeds, the program will be hobbled by the reduction in value of the credits, as a result of tax cuts.

Or consider the powerful mechanism for growing broad-based employee ownership which Congress created with the S Corp Employee Stock Ownership Plan (ESOP). This form of employee-owned company has surged by the thousands in recent years, putting wealth in the hands of Americans who work for great companies like New Belgium Brewing, Cliff Bar, Gardener’s Supply, Recology, and Dansko. Other employee-owned companies include Cape Air in Massachusetts, or Chroma Technology in rural Vermont, a high-technology firm where a worker with a high school education makes $100,000 a year. There are almost 3,000 S ESOPs in the U.S., accounting for $92 billion in direct economic output. Between 2001 and 2011, there was a 60 percent employment growth at S ESOPs (compared to flat growth overall in the economy.)

A key reason for the growth of employee ownership is tax savings. When an S Corp company becomes 100 percent employee owned, it pays no corporate federal income taxes. If such a company is 50 percent employee owned, it pays half of corporate taxes. And so on. But the more that tax rates are cut in general, the less effective this enticement becomes. The growth of employee ownership could stop. 

Simply put, when corporate tax rates are cut across the board, we also cut our ability to cultivate the kind of economy we want. Tax policy is one of the most effective ways we have to grow an inclusive economy that invests in affordable housing and distressed communities, and that puts the benefits of ownership in the hands of working people. Ideally we shouldn’t cut corporate taxes at all. But if we’re going to, let’s preserve enticements for companies to move to employee ownership. Let’s cut taxes for community-based banks, cooperatives, B Corps, and Main Street small businesses. These are the companies and lenders creating an economy where all can thrive. By contrast, let’s not cut taxes for multinationals sending jobs abroad, paying poverty-level wages, or making massive layoffs, or for predatory lenders.

If Trump is serious about creating jobs, let’s remind him that small- and medium-sized, fast-growing businesses are the real source of job creation. Supporting the right kinds of businesses is the way to build the family supporting economy we need. If we’re going to cut corporate taxes, let’s use a scalpel, not a cleaver.

(Image: Jameson Fink, via flickr, CC BY 2.0)

About the author more »

Marjorie Kelly is executive vice president and senior fellow with The Democracy Collaborative, a national nonprofit advocate for sustainable, inclusive community economic development. The organization is active in research, training, policy development, and consulting with communities and foundations nationwide.

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