The Tax Incentive Diversion

Targeted business tax incentives have been the bane of free market economic policy for decades. The business community typically supports them, unwilling to lobby against government policy that directly benefits some of their members. Politicians love them because they provide yet another ribbon-cutting opportunity. In truth, everyone suffers because they require average tax rates (and often marginal tax rates) to stay high in order to pay off what are steep tax cuts for individual businesses. Perhaps its not surprising that some of the states most actively using targeted tax incentives also suffer the most economically.

A case in point is Ohio. Ohio has earned honors from Site Selection magazine for several years as a top business location state even though the state has been bleeding jobs for decades. Ohio ranks high because of the copious types of tax incentives the state offers for those businesses savvy enough to negotiate the process.

A recent article in the Dayton Daily News (May 1, 2011) does a good job of reporting on both sides of the issue. On the one hand, businesses want them to off set tax rates are that are higher than alternative states and locations. On the other hand, virtually no academic evidence shows they “work” in the sense they create net new jobs. From the article:

Mark Calabria of the Washington, D.C.-based Cato Institute, a libertarian research group that has issued several reports on corporate welfare, argues that many of the corporations seeking job-creation incentives don’t actually need the money.

“Most corporations are in a position now where their profitability is pretty good,” he said. “So the argument that people are in need of any sort of bailout rings hollow.”

General Electric Co. is a prime example.

One of the nation’s largest corporations, GE will receive $8.8 million in public funds — including about $6 million in tax credits — to build a research and development center for electrical power systems on the University of Dayton campus.

Last year, GE posted worldwide profits of $14.2 billion, paid no U.S. taxes and instead claimed a disputed $3.2 billion tax benefit while laying off 25,000 workers and hiring 30,000 workers overseas.

“Companies like GE don’t go after the money because they need it. They go after the money because they know they can get it,” said Calabria, who noted that business tax credits, grants and loans are so widely available most companies have simply come to expect them.

States and cities would be much better off cutting taxes and streamlining regulation across the board rather than choosing winners and losers in the economic development tax incentive game.