State Tax Incentives a Bad Business

July 10th, 2009 by Leave a Comment

By Phred Barnet

Giving a tax incentive to a business to encourage economic development sounds like a great idea, but it is not. Tax breaks for businesses are little more than corporate welfare at the expense of hard-working Georgians. They amount to subsidies favoring a select few businesses over Georgia’s residents and existing businesses.

Proponents of tax breaks for new businesses argue the increase in jobs will make up for the reduction in revenue, but tax breaks for businesses rarely pay for themselves and often end up costing the state a great deal of money. That shortfall must be paid for by Georgia’s taxpaying citizens and business, which don’t have the benefit of that break.

Giving a business a tax incentive to move here may help that business in the short term, but in the long term the people who pay for that tax break also happen to be the employees and the customers of that company. Plus, it sends the wrong message to existing Georgia businesses: “If you stay in the state, we will use your tax dollars to subsidize your competitors.”

In June, after the North Carolina Legislature approved a $46 million tax break designed to induce Apple, Inc. to build data warehouses in the Tar Heel State, Scott Hodge, president of the Washington, D.C.-based Tax Foundation, had this response: “Too many legislators confuse targeted business incentives with policies that truly create a better business climate.”

“They are not. They only provide an excuse for lawmakers to avoid real tax reform. Targeted incentives are to a state’s economy what steroids are to the human body – short-term results that eventually weaken the bones, cause heart failure, or worse, impotency. Tax systems should not be used to pick winners and losers or micromanage the economy. Data farms in North Carolina might be a good thing, but it is much better for the marketplace to decide that, not government. The key to a prosperous economy is a tax system that provides a level playing field for all businesses and all industries.”

In Georgia, a new law gives the entertainment industry tax credits for up to 30 percent of production and post-production expenditures.  Proponents argue that if Georgia does not do so, it will lose out to other states. This mentality leads to bidding wars that end up offering more and more incentives to the entertainment industry. 

Former North Carolina Supreme Court Justice Bob Orr recently complained that “the industry has been able to play off North Carolina against South Carolina against Louisiana against Georgia. Louisiana raises its incentives, and it puts pressure on South Carolina, North Carolina and other states to do likewise.”  In fact, only weeks after losing the new Miley Cyrus film to Georgia, North Carolina’s State Senate moved to increase their tax breaks for entertainers from 15 percent to 25 percent.

The chief economist for Louisiana’s legislative fiscal office, Greg Albrecht, estimates that in 2006, Louisiana gave the entertainment industry about $121 million in tax credits, but that only around 18 percent of that money was ever recovered in economic activity and taxes.  He denounced the programs as “an expensive way to create jobs,” maintaining that “there’s no way you can say this makes money for the public.”

At best, these incentives can create temporary increases in economic activity.  Yet these temporary increases do not pay for the costs of the programs themselves. There is no logic in Georgia subsidizing the enormous salaries of Hollywood actors, directors and producers while many of our own residents struggle to get by in this tough economy.

The most equitable tax incentive that Georgia could offer would be to cut taxes on individuals as well as corporations to make Georgia more attractive to individuals and businesses – both old and new.  This would lead to investment and job creation, encourage more businesses to move to Georgia and send the correct message to Georgia’s current businesses.

Phred Barnet, who is completing his master’s degree at the University of Georgia, is a summer intern at the Georgia Public Policy Foundation. The Foundation is an independent think tank that proposes practical, market-oriented approaches to public policy to improve the lives of Georgians. Nothing written here is to be construed as necessarily reflecting the views of the Foundation or as an attempt to aid or hinder the passage of any bill before the U.S. Congress or the Georgia Legislature.

 © Georgia Public Policy Foundation (July 10, 2009). Permission to reprint in whole or in part is hereby granted, provided the author and his affiliations are cited.

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