Bloomberg News

Governors Seeking Jobs Offer Tax Breaks as Budget Woes Ease

February 07, 2012

(Adds Florida, Wisconsin speeches in seventh paragraph.)

Jan. 31 (Bloomberg) -- At least nine U.S. governors, vying for jobs to heal the workplace losses of the recession, have taken advantage of improving budgets to propose tax breaks to entice new employers or company expansions in their state-of- the-state addresses.

States from Alaska to Florida are looking at lowering levies including property, utility and unemployment taxes after recovering revenue and the lowest municipal interest rates since the 1960s helped bolster their finances.

“We are all out there competing against each other and competing in the global economy to create more jobs in our states,” Nebraska Governor Dave Heineman, chairman of the National Governors Association, said in a Jan. 24 interview in Seattle.

States are getting a boost from an economic recovery that has increased tax collections since the beginning of 2010, easing the political fights in U.S. capitals ahead of elections this year. At least 11 governors will be chosen this year, with Wisconsin Governor Scott Walker potentially facing a recall vote forced by foes opposed to his curbs on labor unions.

State tax collections grew for a seventh straight quarter in the period ended Sept. 30, increasing 5.6 percent from a year earlier, according to the U.S. Census Bureau.

Budget Gaps Fall

With more cash flowing in, only California, Missouri, New York and Washington have reported budget gaps since the fiscal year began, a decline from 15 states a year ago, according to the Denver-based National Conference of State Legislatures. Yields on 20-year bonds with a Moody’s Investors Service rating of Aa2, the third-highest, fell in the week ended Jan. 19 to the lowest since April 1967, according to a Bond Buyer index.

Florida Governor Rick Scott, a Tea Party-backed Republican whose approval rating plunged last year amid a clash over school funding, used his speech this month to call for a $1 billion increase for education. In Wisconsin, Walker, a Republican, highlighted his ability to balance the budget without “massive layoffs” while pouring $1.2 billion more into Medicaid, the state-run health-care program for the poor.

In Iowa, Governor Terry Branstad, a 65-year-old Republican, proposed reducing commercial and industrial property taxes by 40 percent over eight years, saying the levies are the second- highest in the U.S.

Costing Jobs

“I believe there is agreement within this chamber that these taxes must be reduced, not because they cost businesses money, but because they cost Iowans jobs,” Branstad said in his Jan. 10 speech to the Legislature.

Georgia Governor Nathan Deal, a Republican, proposed eliminating the sales tax on energy used in manufacturing.

Deal, 69, also offered sales and use tax exemptions for construction materials in projects of regional significance, “giving us an important tool when competing with other states for projects creating large numbers of jobs.”

Kansas Governor Sam Brownback, 55, offered a plan to reduce the highest individual income tax rate to 4.9 percent from 6.5 percent, cut the bottom tax bracket to 3 percent and eliminate individual state tax on most small-business income.

“These reforms will set the stage for strong economic growth in Kansas and will put more money into the pockets of Kansas families and business,” Brownback, a Republican, said in his Jan. 11 speech.

Nebraska Unemployment

Tax incentives have helped Nebraska overcome competition from five other states, including Illinois and Iowa, for a Yahoo! Inc. data center that opened two years ago. The company’s decision came after Heineman, a 63-year-old Republican, signed legislation offering businesses tax and wage credits, sales-tax refunds on purchases linked to expansions and a 10-year exemption on personal property.

Nebraska’s unemployment was 4.1 percent in December, less than half the national rate, and the state has a budget surplus of $414 million, according to Jen Rae Hein, a spokesman for the governor.

This year, in his Jan. 12 state-of-the-state speech, Heineman outlined a proposal to reduce the corporate income-tax rate, eliminate the inheritance tax, and lower individual income-tax rates and expand the brackets for middle-class residents.

‘Better Business Climate’

“If you can create a better business climate through lower taxes, lower regulations, a stronger education system, then you’re going to be more attractive to small businesses, to larger businesses who are looking for the best place to locate,” Heineman said.

New Mexico’s governor, 52-year-old Republican Susana Martinez, proposed exempting half of the state’s small businesses from the gross receipts tax.

“We are competing with other states,” Martinez said. “A recent study ranked New Mexico dead last in terms of our competitiveness. It said we have one of the most burdensome tax codes in the country.”

Utah Governor Gary Herbert, 64, a Republican, on Jan. 25 urged lawmakers to cut unemployment insurance tax rates for the state’s 85,000 employers, “and allow them to create more jobs and hire more people.” Virginia Governor Bob McDonnell, 57, a Republican, offered an investor tax credit to provide working capital to small businesses that he said create 70 percent of new U.S. jobs.

‘Burdensome’ Taxes

Florida’s Scott urged lawmakers to lower “burdensome” taxes on small businesses, while Alaska Governor Sean Parnell, 49, a Republican, pressed lawmakers to approve legislation that would lower taxes on the oil industry to keep production from moving to other states.

Mark Robyn, an economist with the Washington-based Tax Foundation, questioned the effectiveness of such incentives.

“For every tax credit you give away, you have to charge higher tax rates to everyone else,” Robyn said in a telephone interview. “If you’re giving away a tax break to a company, that’s revenue you’re giving up that could be used for public services, like education, or leave it in the taxpayers’ pockets.”

Other governors used their state-of-the-state speeches to pledge they would not increase taxes.

“Every day, we compete with our neighboring states for jobs,” Governor Peter Shumlin, 55, a Vermont Democrat, said in a Jan. 5 speech. “I remain determined not to increase broad- based taxes on Vermonters as we begin to see signs of modest economic growth.”

Challenges Remain

To be sure, states still face challenges. Revenue remained 7 percent below pre-recession levels in the third quarter of 2011, and is “not growing fast enough to recover anytime soon,” according to a report this month by the Center on Budget and Policy Priorities, a Washington-based nonprofit research organization.

“Things are a little better, but we’re still coming out of a deep hole and are a long way from pre-recession levels,” Elizabeth McNichol, a senior fellow at the organization, said in a telephone interview.

Faced with budget gaps, governors in California and Maryland are seeking to raise taxes on high earners. Maryland’s Democratic governor, Martin O’Malley, 49, offered a budget plan that would cap income-tax deductions at 90 percent for those earning more than $100,000 and 80 percent for those earning more than $200,000.

In California, Governor Jerry Brown, a 73-year-old Democrat trying to close a $9.2 billion deficit, has proposed raising income taxes on individuals making at least $250,000 a year to 10.3 percent from 9.3 percent. For those with annual incomes of more than $1 million a year, the rate would rise to 12.3 percent from 10.3 percent.

New York Governor Andrew Cuomo, 54, a Democrat, won lawmakers’ approval of a plan to overhaul the state tax code by raising rates on the wealthiest residents and cutting them for millions of married couples earning less than $300,000 a year.

--With Assistance from William Selway in Washington. Editors: Pete Young, Mark Schoifet

To contact the reporter on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net

To contact the editor responsible for this story: Mark Tannenbaum at mtannen@bloomberg.net


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