New From Rich States, Poor States, Eighth Edition
Confronting Tax Cronyism in the States
Tax cronyism— the deviation from sound economic policy to create a system that benefits one business at the expense of others—is a significant public policy challenge in the states. The data show that keeping tax rates low for all individuals and business is more effective than picking winners and losers through the tax code. In fact, the July 2014 ALEC Center for State Fiscal Reform study, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, found tax carve-outs totaled $228 billion for personal income and business earnings tax exemptions, and $260.1 billion for sales tax exemptions. In the recently released chapter content of Rich States, Poor States, the authors take a look at the good, bad and ugly when it comes to confronting tax cronyism.
The Good: States Take Steps Toward Ending Tax Cronyism
Rich States, Poor States highlights various states that have taken positive steps toward eliminating tax cronyism. Alabama and Nevada both provide great examples. These states have let the sunlight in on tax cronyism when they issued their first tax expenditure reports. Nevada’s Department of Taxation released its first report on tax expenditures, which outlined nearly $4 billion in tax carve-outs in the current fiscal biennium. Lawmakers in Alabama passed a bill requiring the Legislative Fiscal Office to provide an annual report on the state’s tax expenditures. The law requires the report to list all tax preferences and provide an evaluation process to measure the effectiveness of each tax preference. Furthermore, the bill requires biannual public hearings on Alabama’s tax expenditures. Requiring the state to produce a public report on tax expenditures is a major step forward when it comes to eliminating tax cronyism.
The respective decisions by Nevada and Alabama to publish tax expenditure reports lowers the tally of states with no reporting from five down to three. Additionally, 11 states and two cities passed measures requiring tax carve-outs undergo economically evaluated for effectiveness. Previously only eight states were performing such evaluations.
The Bad: START-UP NY Spends $45 Million, Only “Creates” 76 Jobs
While many states took positive steps toward eliminating tax cronyism, New York continued to rely on tax-carve outs. New York ranks dead last in the Rich States, Poor States ALEC Laffer State Economic Competitiveness Index, and the state has also given out 52,132 tax carve-outs to select companies, more than any other state. The track record of New York’s latest tax-carve out, START-UP NY, clearly shows picking winners and losers with the tax code is not a viable economic development strategy. A recent audit by New York Comptroller Thomas DiNapoli found the state spent $45 million to advertise START-UP NY but only “created” 76 jobs. For each job created thus far, taxpayers have spent a staggering $697,368.Once again, New York shows tax carve-outs fail to promote real economic growth.
The Ugly: States Insist “Taxes Don’t Matter,” But Use Tax-Carve Outs Anyway
Not only do tax carve-outs fail to create economic growth, but they can also be a hypocritical policy for some states. Some might claim “taxes do not matter” in creating an economically competitive environment. But while doing so, these very same individuals work to extend special tax-carve outs to encourage businesses to relocate to their state. For example, Connecticut passed large tax increases last session, despite warnings that businesses could not afford another tax hike. Ironically, Connecticut Governor Dan Malloy then tried his best to lure General Electric to stay with a generous tax carve-out package. In the end, however, General Electric turned down Connecticut’s high-tax environment and left for Massachusetts. Lawmakers should create a competitive playing field for all businesses, instead of being caught up in battles for special tax treatment for specific industries.
The eighth edition of Rich States, Poor States demonstrates that many states have taken positive measures toward ending tax cronyism. An overview of the states’ responses to tax cronyism—the good, bad and ugly—demonstrates there is still much work to be done. When lawmakers resort to tax carve outs to increase growth, they are ignoring an even bigger problem—an uncompetitive tax structure. Competitive tax rates with broad bases create a pathway to opportunity for all businesses, instead of just a favored few.