Monday, February 14, 2011

Tax breaks don't build economy

Posted By on Mon, Feb 14, 2011 at 8:21 AM

Timing is good for receipt of this link to a study in Iowa that demonstrates the fallacy of the belief that corporate tax breaks and similar corporate welfare encourage economic development.

It is an article of faith among many legislators and this report will be dismissed out of hand. They don't want to be confused with facts. Still, concludes the Iowa Fiscal Partnership:

Proponents of business tax breaks claim that taxes are a significant factor in the location choices of businesses, and that a state can tax-cut its way to economic growth and generate tax revenue in the process. As we will see, there are good reasons to be skeptical of such a claim, and several decades of research on the relation between state taxes and growth confirm that such claims are vastly overblown and sometimes completely misleading. Business tax breaks turn out to be an expensive and inefficient way to attempt to stimulate a state economy.

Among the points:

* Corporate tax rates are a very small part of the cost of doing business, so have marginal impact.

* When all factors are equal, tax rates have a small impact on corporate locations, judging low-tax states against others.

* Public services matter. When you cut taxes, costs (services) must be cut.

* Tax breaks are costly and inefficient because they have little impact on decisions corporations already planned to make. New jobs don't offset the tax costs because they often bring in-migrating workers who create new costs (more schools, for example.)

* Local giveaways might affect a location within a metro area — a decision in choosing Conway over Little Rock, for example. This may be a big win for Conway, but it's a net nothing for the state as a whole.

But tax or incentive-induced shifts within a labor market produce no benefits for the state as a whole or for the local labor market. The same number of jobs exist and are likely filled by pretty much the same people; some will have longer commutes, some shorter. The incentives merely shift activity around, with no net gain for the region or the state, but with a loss of local tax revenue. State governments should not facilitate such beggar-thy-neighbor competition among their own local government.

This is a particularly apt observation, given that some legislators are spoiling to allow kickback of sales taxes to build retail stores and other commerce with little demonstrated value-added impact.

Even where a business is induced to locate within a state when it otherwise would not have, there may be no net gain in economic activity or jobs or income. A Walmart store, for example, may take advantage of a tax break to open a new store, but in doing so will diminish the sales and viability of existing Main Street businesses. Walmart is not creating new economic activity, but shifting where that economic activity is focused. In fact, there is no case for subsidizing local market activities such as retail; if the market can support the additional activity, we can be sure that private enterprise will take advantage of that market without any subsidy needed.

The putative free marketers don't believe it. They believe that government subsidy is necessary for a successful business climate. The Iowa study also debunks the counter-arguments — everybody does it, we know it works because we say it works, etc.

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