Tax Analysts Blog

Sad Pragmatism and Tax Incentives

Posted on Apr 30, 2014

Readers of this blog know my views on tax incentives -- I believe they are the most pernicious of tax policy choices. I believe they violate every principle of sound taxation. They are neither horizontally nor vertically equitable. They distort markets by design. They lack accountability. They cost money, when the purpose of the tax system is to raise money. Moreover, there is more than ample evidence that many businesses make investment decisions before they even ask for incentives. In other words, incentives generally don't work.

That's not surprising. Much academic research shows that what motivates business location decisions are labor costs and access to markets. State and local taxes are hardly on the radar screen. Public finance experts routinely call for tax systems with broad bases and low rates. Tax incentives are the antithesis of that laudable goal.

I'm not changing my mind on the evils of tax incentives. But maybe my stridency isn't helpful. I had the opportunity to hear Douglas Lindholm, president of the Council On State Taxation, speak at the New Mexico Tax Research Institute recently. Lindholm is not only among the savviest of advocates, he is also widely considered a good tax policy guy. When he speaks, people, including me, listen.

In New Mexico, professor Richard Pomp and I were vociferously blasting the use of tax incentives. Lindholm admonished us for being unrealistic and for living in an ivory tower. He pointed out that although tax incentives may be theoretically bad policy, they've been around forever and will continue to be part of all economic development discussions. Essentially, he said that no amount of academic opining (or whining, for that matter) would change that. He urged policymakers to evaluate incentives programs and to hold the programs accountable through clawback laws.

My view has always been that talk of evaluating incentives rather than repealing them amounts to, well, surrender. Then I recalled when Greg LeRoy, executive director of Good Jobs First, began advocating for transparency, clawbacks, and living wage laws to accompany tax incentives. Good Jobs First is a watchdog for progressive tax policy and, as far as I'm concerned, the leader in the fight against tax incentives. Good Jobs First, to its credit, is largely responsible for the enactment of every tax incentive accountability measure in this country. I distinctly remember thinking that Good Jobs First was surrendering when it called for those accompanying measures.

But LeRoy and Lindholm (who never agree about anything) take a pragmatic approach to tax incentives. The truth is that tax incentives have been around forever. Politicians give them out because they fear companies will leave and take their jobs with them, because they want credit for economic development and job creation, and because they can't conceive of alternative economic development policies. Improving education, infrastructure, and market access will lead to more economic development. But those investments take time, and politicians have short attention spans. They give away the public fisc because they are largely unimaginative cowards when it comes to economic development.

The reality is that lawmakers have been giving and will continue to give incentives. Good Jobs First and Lindholm made me think about the issue a little more discerningly. They're right, of course. If tax incentives are an unavoidable reality, we should make them as transparent and accountable as possible.

Even so, as I said in 2008, "Practical approaches reflect reality. But they obscure the fact that tax incentives violate good tax policy. That's what is sad."

Read Comments (4)

Jay StarkmanApr 30, 2014

Tax incentives are also a good vehicle for extorting campaign contributions, as
well as contracts and patronage jobs for relatives.

emsig beobachterMay 5, 2014

Lindholm is not a disinterested analyst.

Tax incentives are, at best, a third best policy option for economic
development. Keep carping, whining, etc. Perhaps someday policy makers will
listen. Besides, you're getting paid to carp, whine, etc.

david brunoriMay 5, 2014

Jay, You are correct -- again sadly. Emsig, Lindholm is hardly disinterested.
He recognizes (I think) that an ideal tax system would have a broad base and
low rates -- and that ideally tax incentives are bad. His point is that they
are here to stay. I will need a lot of help carping to change things.

emsig beobachterMay 6, 2014

Do not despair; you're not the only one bemoaning these ridiculous incentives.
A prophet is without honor in his/her own land.

Perhaps a copy of John Nash's treatise on cooperation (dumbed down of
course)could be provided to each state/local policy maker, gratis. Imagine,
rather then all these cockamamie credits, etc., States would charge development
impact fees. INCROYABLE!!!

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