Alabama is losing good companies to other states. Companies are not only leaving, but the number of new companies headquartering in Alabama has slowed since 2008. This trend predates the Great Recession; since the late 1990s, the number of large, publicly traded companies in Alabama has fallen by more than 50 percent.

But who can blame a corporation for leaving when it can save $15,000 on $1 million of income from a 1.5 percent lower corporate income tax rate just by relocating across the border to Mississippi? Or, if it looks just a little farther west, Texas’ zero corporate income tax translates into savings of $65,000 on the same $1 million of income.

Alabama’s 6.5 percent corporate tax rate is about the average among U.S. states. Reducing the amount companies are forced to hand over to the government would make the state stand out from others as an appealing place to set-up shop. Numerous examples show that businesses migrate to states that allow them to keep more of their revenues.

In 2006, Torchmark Corp., founded and headquartered in Birmingham since 1900, left for McKinney, Texas. The health insurance company then went on to spend $27 million on its new Texas facility and now employs about 1,000 people.

Since the Great Recession began in 2008, Alabama has been the fourth worst state in terms of job loss. Only Nevada, Arizona and Florida — three states hit particularly hard by the housing bubble bursting — have fared worse than Alabama. With an 8.5 percent unemployment rate, Alabama cannot afford to drive businesses like Torchmark out of the state. The good news is that Alabama can take steps immediately to make itself more attractive for businesses, specifically by lowering its corporate income tax rate.

Comparing economic growth disparities between Mobile and Pascagoula, Miss., offers clear evidence that corporate tax rates matter to businesses. Both are industrial cities along the Gulf Coast and both are dependent on trade. Yet, in 2008 and 2009, economic growth rates in Pascagoula were above 23 and 8 percent, respectively, while Mobile did not experience any economic growth during the same time period. To put these rates into context with the rest of the country, real national economic growth stood at -0.3 percent in 2008 and -3.1 percent in 2009.

The high rate of economic growth in Pascagoula, which was the fastest growing Metropolitan State Area in the U.S. for 2008, placed the city in a better position to face the challenges of the Great Recession. Yes, it lost jobs during the economic downturn, but rapid economic growth prevented the impact from being much worse.

Such large differences across state borders, where cities share many characteristics and depend on a similar base for economic growth begs the question: what are they doing differently? The 6.5 versus 5 percent corporate income tax pops out as a striking distinction.

Thanks to more favorable corporate tax rates, Pascagoula has been able to retain companies like Chevron. Its refinery alone provides 1,500 direct jobs and hundreds more for contract work. And, other companies such as Signal International have grown and added jobs in recent years.

When businesses are able to keep more of their revenues, they can reinvest that money into growing the company through physical expansion, new equipment or additional personnel — all of which lead to job creation, higher incomes and all of the other benefits of economic growth.

High corporate tax rates keep businesses away and encourage the ones Alabama has to look elsewhere. Alabama’s high rates are good for Mississippi residents but bad for us.

Lower tax rates can help Alabama retain the businesses it already has and help attract new ones. The approach will lead to more better-paying jobs in our state, less taxes for the entrepreneurs doing business in Alabama and a higher standard of living for all.

 

Scott Beaulier is executive director of the Manuel H. Johnson Center for Political Economy at Troy University. Email: sbeaulier@troy.edu