Opinion Piece Takes Aim at Tax Incentives

building-768815_1920.jpgAn opinion piece in Tax Notes argues that tax incentives are nothing more than giveaways to preferred taxpayers. Contributing Editor Roxanne Bland writes that just because some tax incentives can be used for good does not negate the inherent unfairness in them.

According to Tax Notes:

Tax incentives meant to attract businesses and individuals with the aim of revitalizing blighted areas in a city come to mind when considering the positive side. These incentives granted to companies to locate or relocate in a specific area can result in a region’s overall economic growth by attracting other businesses taking advantage of the new opportunities that arise because of the company’s presence. If implemented responsibly, there is no reason to outlaw the use of tax incentives for purposes of economic development.

Here in the Old Line State, the One Maryland Tax Credit Program provides two income tax credits to businesses that initiate major investment projects in the State’s most economically distressed jurisdictions. The Project Tax Credit can be as much as $5 million and the Start-Up Tax Credit can be as much as $500,000.

But Bland says that, in certain circumstances, tax incentives could run afoul of the 14th Amendment’s equal protection clause.

Business competitors identical in all respects except that one is paying less in taxes because of tax preferences could leave the government entity that granted the break vulnerable to a lawsuit by the non-favored business.

Targeted tax incentives, according to Bland, are the worst of all.

Proponents often frame a deal in terms of benefits that would not or could not happen in its absence. In some ways, it is a trickle-down strategy at the local level—targeted financial incentives toward a single company with the promise that the community and its residents will benefit from the job creation and investment that follow.

Aside from creating business compliance and government enforcement problems, studies have shown that targeted incentives do not work, and may even cause harm. The job creation and other regional economic benefits that justified granting a tax boon to a business do not always materialize, leaving the state worse off than it was before. Or if the promised jobs do materialize, they may be filled by outsiders — to the detriment of the state’s homegrown population.

The influx of new residents could also force governments to upgrade existing transportation infrastructure to accommodate the increased traffic, and the increased taxes generated by the new residents’ jobs and purchases may not be enough to offset the cost. When this happens, the revenue lost to tax incentives, which provides services to businesses and individuals, must be made up elsewhere. To do that, governments might have to raise taxes on other non-preferred taxpayers or cut needed services to businesses and individuals. Even more egregious is that a business insisting on tax incentives might have moved to the jurisdiction anyway without them — the deal is nothing more than a government shakedown.

Amazon set off a nationwide bidding contest when it announced it was looking for a site for a second headquarters. The Maryland General Assembly approved $8.5 billion in tax and infrastructure incentives, the largest economic development package in state history, on the hope the tech giant would build a new headquarters here.

Although Maryland ultimately lost out on the highly-publicized, Olympic-style search that lasted over a year and attracted 238 bids from across the United States and Canada, our economy could still see residual benefits. The internet retail behemoth says that the Crystal City headquarters “will spur the creation of tens of thousands of additional jobs in surrounding communities.”

And while only time will tell whether or not Maryland reaps any benefits from Amazon’s Crystal City headquarters, Bland says that the lengths to which state and local governments will go to persuade a business to locate in their jurisdictions are particularly troubling:

It’s not just the outlandish monetary and other promises offered, although that’s bad enough. Call me a snob, but I believe governments should present a dignified demeanor when interacting with nongovernmental entities. In recent times, the antics states and localities have engaged in to lure businesses to their jurisdictions are downright cringe-worthy.

So while state and local governments wrestle with how to best strike a reasonable balance between attracting economic development and subsidizing corporate profits, Bland’s outlook is bleak:

In the end, tax incentives are nothing more than giveaways to preferred taxpayers. If governments insist on using them for economic development, the least they can do is use them responsibly. Will it ever happen? Well, as a friend of mine would say — “good luck with that.”

Roxanne Bland is State Tax Notes’ contributing editor. Before joining Tax Analysts, Bland spent 17 years with the Multistate Tax Commission, where she worked with state revenue agency representatives to draft model legislation pertaining to sales and use taxation and corporate income, analyzed and reported on proposed federal legislative initiatives affecting state taxation, worked with legislative consultants and representatives from other state organizations on international issues affecting states, and assisted member state representatives in federal lobbying efforts.

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Tax Notes: Taking Aim at Tax Incentives

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