[U]nless paired with a commensurate reduction in the overall corporate tax rate itself, eliminating or restricting the deduction would amount to a tax hike that would have repercussions far beyond balance sheets.

Tweet

Amid rising economic uncertainty, few ideas could be more counterproductive than raising taxes on American businesses and employers.  

Alarmingly, however, some in Washington, D.C., advocate reduction or outright elimination of the federal corporate state and local tax (C-SALT) deduction without proportionally lowering the corporate tax rate.  Doing so would increase the amount of revenue that businesses owe the federal government, thereby amounting to a tax hike by definition.  

Although unfamiliar to many Americans, the C-SALT deduction in question plays a crucial role in making American businesses more competitive against international competitors.  

Under current law, U.S. corporations can deduct state and local income taxes paid when calculating their taxable federal income.  That’s not some sort of loophole or corporate handout, but simply a mechanism recognizing how corporations operating across multiple states within our federalist system of government must pay varying levels of taxes in those states.  If the tax burden to operate in any given state gets too high, corporations would otherwise be incentivized to avoid offering products or services in those states.  

And unless paired with a commensurate reduction in the overall corporate tax rate itself, eliminating or restricting the deduction would amount to a tax hike that would have repercussions far beyond balance sheets.  It would necessarily undermine investment, reduce research and development, reallocate resources away from expansion, raise prices for consumers and threaten jobs.  

That’s because for businesses, higher tax burdens mean increased sunk operating costs.  To accommodate them, those businesses possess limited options:  reduce hiring or eliminate existing jobs, cut wages, slash investments or pass the higher costs on to consumers.  Each of those outcomes spells trouble in an increasingly turbulent economic environment.  

Small and midsized businesses would be particularly hard-hit by elimination or reduction of the C-SALT deduction without further reductions in the rate.  Unlike larger multinational corporations that can shift profits internationally, smaller businesses must bear the brunt of state and local tax burdens.  With a reduced or eliminated C-SALT deductions, those businesses would face even choppier financial seas.  

Perhaps most disturbingly, as noted above, would be the impact on jobs.  The more that businesses must allocate toward taxes, the less that they can invest in their workforces.  Higher corporate taxes historically correlate with slower job growth and wage growth, so if employers adjust to higher tax liabilities they become more likely to engage in hiring freezes or layoffs.  

Although the 2017 Tax Cuts and Jobs Act (TCJA) during the first Trump administration reduced the federal corporate tax rate to 21% from the industrialized world’s highest at 35%, we still impose a higher-than-average burden when federal, state and local corporate taxes are combined.  Accordingly, eliminating or reducing the C-SALT deduction would only push effective corporate rates higher once again.  

That would place U.S. businesses at a decided disadvantage against international competitors in nations with lower tax burdens, who can reinvest more capital toward innovation and expansion.  If the U.S. moves in the opposite direction by raising our corporate tax burden, it will thus drive investment offshore, leading to capital flight and job loss.  

A superior alternative for policymakers would be to pursue tax reform promoting growth and ensuring a stable and competitive business environment.  That means preserving the C-SALT deduction, or substantially reducing the corporate tax rate if the deduction is reduced, in order to avoid a tax increase.  Other tax reform ideas like full expensing and bonus depreciation should also be considered in order to incentivize capital investment, job creation and research and development.  

Whatever other reforms occur, however, leaders must avoid stripping away the C-SALT deduction unless accompanied by offsetting corporate tax rate reductions.  To do otherwise amounts to a backdoor tax increase that will only stifle economic growth, reduce investment, threaten jobs and undermine global competitiveness for U.S. businesses.  

That would reverse the positive reforms and progress brought on by the TJCA of the first Trump administration, which cannot be allowed to occur.