No matter which presidential candidate wins on Nov. 5, business groups are bracing for another epic tax policy fight in 2025. Predictable battle lines have already fallen into place: Harris wants to raise corporate taxes and Trump wants to lower them.
A more interesting but lesser known tax debate will take place in state capitals around the country. Most states will have new legislatures and 13 states could have new governors in 2025.
Our laboratories of democracy will naturally take different approaches as they compete for jobs and investment during a year that could bring an economic recession. North Carolina is already scheduled to eliminate its corporate income tax by 2030. Meanwhile, New York and Maryland are considering tax increases to plug their growing budget shortfalls.
But no matter whether states want to raise taxes or lower them, our current tax policy treats all companies the same. We don’t factor in their commitment to our states and nation.
Or, lawmakers have treated the budget as a political Rorschach test — they see an opportunity to reward their favorite industries with tax breaks. Democrats might reward clean energy projects with lower tax rates. Republicans might reward traditional energy producers.
Instead, we should reward companies that benefit our communities, regardless of political priorities that can change every four years.
State governments should adopt tax policy that favors businesses that make real investments in the local economy. If your business invests in local real estate, local products and local people, you should get a better tax rate than, say, an online Chinese retailer whose only connection to your state is via a high-speed internet cable.
Nebraska has adopted a small-scale version of this approach. Next year, the governor wants to continue with a larger overhaul of the state tax structure that would allow for broadly lowering property taxes. This would reward companies that make direct investments in the community.
More states could experiment and expand upon this policy. Direct investment translates into more local infrastructure, more local jobs and more employee development.
Companies that pay for real estate, physical assets and other infrastructure in their communities could pay a lower rate. The Department of Treasury estimates that every dollar invested in infrastructure generates about $1.50 in economic output. These assets make the community a better place to do business and attract other companies that hire more workers and make further investments in local infrastructure.
Companies that actually create local jobs could pay a lower rate. This would encourage companies to hire local workers whose paychecks stay in the community and help grow the local economy.
Companies that invest in job training could pay a lower rate. Research has consistently shown that investment in human capital improves the quality of the workforce over the long term. It strengthens the socio-economic fabric of the community, reducing income inequality and supporting sustainable economic growth.
On the other hand, big corporations that do business in the state — but are located across the ocean and sell products also made there — might pay a premium rate. Rather than investing in the community, they see it only as a marketplace of buyers. They don’t create local jobs and rely on local infrastructure that others paid for and built.
State legislators might ask how they can quantify a company’s commitment to the state and, thus, determine the tax rate they should pay.
One measure a state could consider is an employee-to-profit ratio. For example, if a company employs 10 people in the state for every $10,000 of profit they make, it would pay a lower tax rate. If a company only employs one person for every $10,000 in profit, it would pay a premium rate.
Similarly, the value of a company’s investments in local real estate and infrastructure could factor into its tax rate.
States could also factor in the company’s spending on local employee training and development.
Small businesses are the backbone of many communities, and they would naturally have an advantage under this tax structure. For example, a business owner who opens a restaurant will invest in local retail space, hire and train local staff, and buy equipment. This business would benefit from lower tax rates because of its commitment to the community.
A locally-focused tax policy will be even more important in the coming decades as our economy shifts due to the rise of artificial intelligence, as companies have less need for local people and local infrastructure.
To be sure, states can embrace new technologies while at the same time making them contribute to the success of our communities.
As states debate tax policy reform, they would be wise to consider the impact of businesses that make real investments in the local economy, versus those that view the locals as merely a market to be reached remotely.
Karen Harned is president of Harned Strategies LLC. From 2002 to 2022, she served as executive director of the National Federation of Independent Business Small Business Legal Center
