Tax Analysts Blog

If You Need Tax Credits, You Shouldn't Be in Business

Posted on Mar 9, 2016

OK, I'm trying a new tack: shame. I have been criticizing special tax breaks and incentives for 30 years by pointing out that they violate every principle of sound policy. Politicians don't even pretend to care about sound tax policy. But we know that state taxes aren't all that important in business location and investment decisions -- there are other, more important factors, such as whether the action will be profitable.

But now I'm going to appeal to the pride of the business community. I say to you, the business leaders of America, that if you need government tax credits to make a go of it, you should do something else. If you can't compete without a handout from your friends in the statehouse, you probably can't compete. And if you can compete and make a profit without a welfare check, why are you taking it? Have some pride. Help fix the tax system.

Here's what got me thinking. Iowa -- no paradise when it comes to good tax policy -- gave 186 companies tax credits worth more than $42 million last year. Those credits were handed out as an incentive to conduct research and development. There are other credits available for businesses. Oh, and the credits are refundable because, like with poor families receiving the earned income tax credit, R&D credits provide a critical safety net. All right, I'm being facetious.

Iowa's biggest welfare recipient was technology company Rockwell Collins Inc., which received $12 million. Rockwell is a great company, but it has $5 billion in revenue. Giving money to Rockwell isn't quite the same as giving money to a shoestring nonprofit feeding the homeless in Des Moines.

In all, 20 companies claimed more than $500,000 in R&D credits, including DuPont Co., Deere & Co., and Monsanto Co. I ask them, where is your pride? Do you really want a government handout?

Please note two things. First, I'm no high-tax guy. I would provide the biggest tax incentive possible by repealing the state corporate income tax. Second, contrary to what some of our readers think, I didn't just fall off the turnip truck. I understand that if presented with a tax break, people will take it. Heck, I take every deduction offered to me. But do businesses in Iowa really need handouts? I very much doubt it. And I think the state would be better served if that $42 million were spent on something else. So I say have some pride, business people. Let's fight for a tax system with a broad base, low rates, and no special deals. We will all be better off.


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