Tax Analysts Blog

Greed, Piracy, and Cowardice

Posted on Apr 8, 2015

Several people have asked me recently where the blame lies for the 30-year proliferation of tax incentives. Some folks blame greedy corporations for trying to take advantage of interstate competition. Others blame the pirates at economic development consulting firms (and I include big law and accounting) for devising can't-lose strategies for rapaciously emptying public coffers. Still others blame the craven milksops that make up our political class. And others maintain that the fault lies with a federal system in which tax incentives are inevitable -- so there is no one to blame.

I have written about 100 articles on tax incentives, all of them critical. I don't blame the "greedy" corporations. State and local taxes are a relatively small part of the cost of doing business. Corporations are handed opportunities to minimize their tax burdens -- legally. And rationally, they take advantage of those opportunities. The biggest factors in deciding where to invest are labor costs and broad access to markets. If we ended all tax incentives tomorrow, there would be virtually no effect on the economy. Corporations would still be investing where they are investing.

An entire industry is dedicated to helping corporations find and negotiate tax incentives. Stories are legion of tax professionals advising corporations to delay announcements of planned investments so that better incentive deals can be had. Many of our readers engage in this activity. The professionals who work for law, accounting, and consulting firms are smart. Indeed, they are among the smartest people in the business. But this is a business. States are willing to give tax incentives, and people are willing to use their wiles to earn a handsome living navigating the incentive landscape. So I don't blame the lawyers and consultants any more than I blame sports agents for the high salaries of professional athletes.

To the extent blame is to be assigned, it rests solely on our political leaders. Governors, and to a larger extent legislators, have the power to grant or deny incentives. If they adhered to the principles of sound tax policy, they would build tax systems on a broad base with low rates. There would be little, if any, special treatment. But they don't, because they are driven by two human conditions -- greed and fear. They want a big corporation with thousands of employees to move to their state. They believe, incorrectly, that the way to achieve that is to give tax breaks that are unavailable to the rest of us. Conversely, they fear that a company might leave and take the jobs with it. They believe the only way to do that is through the tax code. I have said that politicians are unimaginative cowards when it comes to incentives. I don't think that is too strong a statement. Of course, we put them in power. So perhaps the real blame lies with us.

This post is part of a longer article that first appeared in State Tax Notes.

Read Comments (2)

edmund dantesApr 7, 2015

"If they adhered to the principles of sound tax policy, they would build tax
systems on a broad base with low rates."

This is the core point. To be able to have this policy, the governors need to
restrain spending. But this they adamantly refuse to do.

Although it is true that direct business taxes are not terribly important for
most business location decisions, the total tax burden can be a critical
influence. Our top-tax profile in CT (last tax freedom day in the country) has
led to higher medical and utility costs as well, which makes having employees
that much more expensive.

A decade or so ago, a well known manufacturing company was deciding whether to
close a plant in CT or in the south, I think Georgia. The CT employees were
higher paid, but that wasn't determinative. The company did a survey of
employees, and discovered that the higher-paid CT employees were less satisfied
with their compensation, because after higher taxes, utilities and other
expenses they were barely keeping their heads above water. Those who nominally
earned less in a low-tax state were nevertheless more satisfied with their
take-home pay. (They paid lower federal taxes also, of course.)

Needless to say, the CT plant was closed. No amount of targeted incentive
could have changed that.

I recently learned that Colorado adopted a constitutional limit on growth of
state spending in 1992. It has worked so well that, with 20% more citizens than
CT, Colorado's per-person tax burden is 33% lower. All states should follow
this example.

robert goulderApr 9, 2015

David: Here's an idea -- totally impractical of course, but we can always
dream. Take the ability to issue tax incentives away from politicians. Instead,
put all proposed incentives (and other deviations from the basic tax base) on
an annual referendum ballot. Spell out the particulars in full detail, and let
the voters decide in an up or down vote. If, for example, the good people of
Nevada decide to throw vast sums of money at Tesla in exchange for promises of
new factories and job growth, then so be it. Maybe we could do the same for
property tax exemptions.

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