It’s Fix the Tax Code Friday! Yesterday, I blogged about NC’s efforts to woo Apple and Google to the Tarheel state by passing corporate tax breaks directed at each of them. This is nothing new. In my own state of Pennsylvania, a new film tax credit is being touted in an effort to bring more filmmakers to the area. Similar programs have also been created in parts of Canada, like Vancouver, to attract moviemakers up the coast and away from California.
And sometimes the credits are not so much about attracting a company as keeping it from going (see almost every professional sports team stadium in the US).
The idea behind these tax credits is that bringing industry will create jobs. Those jobs will result in the need for more local services. And voila, it’s a ripple effect. But that doesn’t always happen. And when it does happen, it’s not always at the level that the lawmakers had hoped.
But sometimes it does work.
So today’s “Fix the Tax Code Friday” question is:
Are tax breaks targeted towards keeping or attracting certain companies worth it? And if so, does it matter that the individual taxpayers may have to pick up the slack through increased tax rates or decreased services in the short term if the plan is for increased revenue to the state (or locality) in the long term?
Two matters on the issue come to mind –
(a) people have a hard time predicting the future in complex systems and also tend to over estimate on the good side … some literature on this supports the thought and it is my general observation over the years. In the long term it seems like guesses would work as good as the analysis backed estimates.
(b) the tax breaks have become an entitlement in many respects that businesses look for and therefore get … and will likely continue to get.
I think the theory is probably ok that there are benefits but maybe the mechanics need to be worked on (less give aways, shorter times, and so forth). The problem is that governments may get into bidding wars.
In some cases if things do not manifest in the real world as they did in the studies, there can be a serious negative echo effect (schools can’t get funding, basic government services lag because of a lack of funding, etc.) and the agreements are long term and difficult to get out of.
I do believe the concept is here to stay.
If we assume the premise is true that tax breaks for a company or industry will spur growth why not lower the taxes across the board and stimulate all areas of the economy??? Seems like a no-brainer to me.
Our Federal system has created this “competition” among the States to get business facilities and the jobs they bring. I suppose it can look good to businesses; they can tell pretty well what tax saving they will get. What’s harder, of course, is predictung the benefits to the states or localities where they locate. These two examples are egregious, of course, but sometimes it has to work.
Forty years ago I was a student at Duke University. Durham was a seedy little town whose main industries were tobacco and low-grade textiles. Raleigh wasn’t much better and Chapel Hill was a college town and nothing more. The Research Triangle “concept” was just getting underway, and there was much excitement when, as I remember, IBM chose to locate a facility at Research Triangle Park. Today the whole area is a rapidly-growing high-tech mecca completely unrecognizable as the Southern backwater I lived in. I have no idea if there were tax breaks for the outfits that were lured there, but I’ll bet there were. And it would be hard to argue that whatever those breaks may have been, in the long run they were well worth it.
I doubt the tax credit scheme results in higher total revenue. Handouts generally waste tax money. Look at the Post Office, Amtrack, and research grants.
Are they worth it? No. They gut state and local tax bases. And they are unfair to existing businesses, who wind up subsidizing their competitors.
Congress should amend § 118 to make these giveaways fully taxable.