New Report on Tax Cronyism in the States

As the quest for tax reform sweeps the nation, policymakers are faced with the dilemma of how to best build a tax code that promotes fairness, removes roadblocks to economic growth and maintains enough revenue to provide the proper amount of public services. As ALEC has pointed out in Rich States, Poor States and other publications, low tax rates and smart tax choices are the path to prosperity because they increase a state’s competitiveness and are the least hurtful to productivity.

However, in the effort to lower rates and make the tax code less of a burden, there is another impediment that has proliferated across the states: tax cronyism, or exceptions in the tax code that allow targeted individuals, firms or industries the opportunity to pay lower taxes than the statutory rate. In the new report, The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth, ALEC details the pitfalls and false choices presented by tax carve-outs and conducts an extensive review of tax cronyism in the 50 states.

Within this new publication, readers will find a full analysis of tax carve-outs, their implications, their usage and the false premise that they are an effective policy tool for promoting economic growth. The distortions and rent seeking incentives they produce are exposed, and the authors demonstrate how many of these carve-outs are merely a form of state sponsored cronyism, rather than methods of “economic development.” Examples of individual credits, exemptions, and deductions are examined, and the report outlines what criteria must be met for these to be labeled state favoritism and what are legitimate, sound economic policies.

Using data from the most recent state tax expenditure reports, the authors are able to calculate approximate totals of exemptions from the general tax base, and identify where some states need improvement when it comes to reporting. In the most recent year in which each state published their respective tax expenditure reports, the sum of tax carve-outs was as follows: $228 billion for personal income and businesses earnings tax exemptions and $260.1 billion in sales tax exemptions. States vary widely in what they report, how often they report, and what reports on specific tax carve-outs actually include; making it difficult to see a clear picture of the extent that tax cronyism exists in state tax codes and impossible to uniformly compare between the states in a precisely accurate way. But, by collecting the data from multiple sources, readers will have a new way to understand tax cronyism in the states and its approximate costs for state economies.

Finally, The Unseen Costs of Tax Cronyism provides solutions that policymakers can implement to address the problem of tax cronyism in their state. The report highlights positive steps taken in states like Michigan and Washington and shows that tax expenditures can be reformed in a way that allows state government to reduce the overall tax burden.

Reducing tax cronyism is a strategy policymakers can take to reduce the complexity of their tax code and lessen the overall tax burden. A simple tax code, free of preferential rates, unfair exemptions and overbearing government manipulation, will be a magnet for business and can help states fully realize their potential for economic growth.