Tax Credits in California: Economic Growth Engine or Wasteful Corporate Welfare?

Shining a light on California's most egregious tax credits and exemptions

All states, to some extent, use their tax codes to advance specific policies. Those various policies can be reflected in differing tax rates on individuals, businesses or activities. In addition, tax forebearance, or “tax breaks,” can be used to advance policies thought to be beneficial. But such tax breaks tend to be a polarizing topic, with some viewing them as salvation for individuals and businesses suffering from high taxes, while others view them as loopholes or corporate welfare for unscrupulous businessmen. The scandal that erupted when Fremont, CA-based solar cell manufacturer Solyndra declared bankruptcy and defaulted on government-backed debt is a case in point. In addition to the $528 million loss that federal taxpayers took on loan guarantees Solyndra was unable to pay back, the company also received $25 million in California state tax exemptions that ultimately proved to be a waste. This painful lesson did not prevent the legislature from passing, on the last day of the 2012 legislative session, a two-year, $200 million extension of the state’s film tax credit, however.

Proponents argue that while cases such as Solyndra are unfortunate, they are a necessary evil that must be tolerated since the benefits of governmental “investing” in certain technologies or industries will, in their view, someday outweigh the costs. Critics cite it as a classic example of government using—and losing—taxpayer dollars to play favorites and advance a political agenda by interfering in the market.

This study looks at certain corporation tax and sales and use tax credits, deductions and exemptions in order to evaluate whether they serve their purpose. The argument offered in support of such tax breaks is that they will improve the lives or livelihoods of certain classes of individuals, businesses or industries. But their costs are frequently ignored. While they may encourage business activity in a certain sector of the economy, this comes at an unseen cost, which is the business activity that would otherwise have taken place in other sectors of the economy. The relevant question then is: does such favorable treatment really result in a net gain to the economy and the state? Or is it a zero-sum game in which politically favored industries benefit at the expense of those without political pull in Sacramento? Or—worse—is it a negative-sum game in which favored interests benefit at the expense of the economy and the state?

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