Tax Incentive Disease

The Cato Institute and I share a pet peeve: business tax incentives. In its “Fiscal Report Card on America’s Governors 2012,” author Chris Edwards chastises a practice that is prevalent in Virginia: the granting of special-interest tax breaks to favored businesses under the guise of economic development. States the report:

While some governors are pursuing broad-based tax reforms, others are trying to micromanage their states’ economies with “tax incentives.” These narrow, special-interest tax breaks have spread like a contagious disease over the last decade or so. Most states now offer dozens of tax incentives targeting favored types of businesses and activities.

Tax incentives are bad policy for several reasons, writes Edwards. They create unequal treatment between different companies and industries. The favor businesses that have good lobbyists or pander to the economic-development fad of the day. Incentives also create compliance burdens because bureaucrats need to audit companies to see if companies delivered on the investment and job creation they promised as a condition for getting the taxbreaks. (Furthermore, I would add, tax incentives are not transparent. They don’t appear in state budgets as line-item expenditures.)

The misuse of tax breaks is a nonpartisan affliction, highlighting the hypocrisy of both political parties. “Republican governors often claim allegiance to free markets, but their support of tax incentives amounts to support of central planning,” says Edwards. Likewise, Democrats rail against special treatment for the rich and powerful, and then turn right around and shower them with tax benefits.

I totally agree with Edwards’ conclusion: “The spread of state tax incentives represents a troubling move away from free markets and toward crony capitalism, similar to what we have see at the federal level in recent years. … Policymakers at all levels of government need to understand that we will achieve the strongest economic growth if we have low and neutral taxation that treats all industries equally.”

– JAB

6 Responses to Tax Incentive Disease

  1. JLARC will be presenting its study of Virginia’s business tax credits and development grants next month. We’ll be able to see how his rather generic libertarian critiques hold up to real analysis.

  2. As a one term governor, McDonnell can’t really push for broad based tax reforms and expect to be in office to see them through. Again, being the only state where the governor can’t run for a second consecutive term is a problem. It forces an emphasis on short term thnking rather than long term thinking.

    Jim, you should really stop blaming the governors of Virginia and place the blame where it belongs – on the inbred General Assembly.

  3. Isn’t the one term limitation (which I agree is wrong), a CONSTITUTIONAL limitation?

    so was it ALWAYS one term ..i.e. in the original Constitution or was it originally two or more terms but then reduced?

    not sure I understand how one term is connected to tax incentives..

  4. LarryG:

    There have been eight rewrites of the Virginia constitution as I recall.

    The latest was voted into effect in 1970 or thereabouts.

    I assume the one term limit was in the original 1970 constitution although it could have been added later.

    However, the process to amend the state constitution involves the General Assembly voting, then the people voting, then the amendment is effective after the next state-wide election. At least, that’s my recollection.

    So, the General Assembly could pretty easily put the matter on the ballot.

    There is a proposed amendment coming up on the ballot this November regarding property rights.

    http://www.washingtonpost.com/local/dc-politics/property-rights-amendment-headed-for-virginia-ballot/2012/07/16/gJQAs6uZpW_story.html

    So, the General Assembly could get this question into the voters’ hands. But they don’t. To the General Assembly, you and I are just “little people” who can’t be trusted to decide things for themselves. So, we remain the only state in the US where a governor can’t run for a second consecutive term.

    As for tax incentives, I agree with Jim’s point that a more enlightened overall tax policy is preferable to “hit or miss” tax incentives. I disagree with his characterization that this is realistically within the control of the governor.

    A one term governor would need a remarkable set of circumstances to take office, establish an overall tax reform package, pressure the General Assembly into voting for his or her tax reform approach and then sign the bill into law. Getting something like that done would require a lot of arm twisting. In effect, the governor has one election during his tenure to apply pressure and that election only applies to one third of the state senate. If the governor were allowed two terms, he or she would have three elections during those two terms to apply pressure to the General Assembly. In my opinion, that would be sufficient for a determined governor to enact the comprehensive tax reform that Jim suggests. However, a single term is insufficient. So, the governor has no real alternative to using scattershot tax incentives as business development “treats”.

  5. Well.. citizens in Va cannot initiate referenda so they are “governed” by the GA but the thing about property rights is proof positive that they DO CARE about the “little people” in my view.

  6. Only a handful of states have Home Rule. And even Home Rule allows the state to reserve authority on anything it wants to.

    There are no places where Home Rule is autonomous rule which sounds like what DJ wants.

    So I’d challenge him on two issues:

    1. – name any state where Home Rule gives localities autonomous control – I do not think it exists but perhaps DJ knows of some places where it does exist

    2. Assuming that there are no autonomous rule examples, then name the specific things that Fairfax/NoVa are currently unfairly restricted on that need to be un-Dillon-ized.

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