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Tax Incentives' Bipartisan Folly

September 24, 2018 in Economics

By William Ruger, Jason Sorens

William Ruger and Jason Sorens

Tax rates are a critical factor that businesses pay attention to
when deciding where to invest. That may sound like a conservative
belief, but when it comes to attracting investment and jobs to
their states, Democratic governors use corporate tax incentives and
economic development zones at least as much as their Republican
counterparts.

Consider the example of New York Gov. Andrew Cuomo. Promoting
one of New York’s many tax incentive programs, Cuomo argued earlier
this summer that “businesses do not come to New York state without
government incentives. Businesses literally shop states. … It
literally takes money to make money.”

Cuomo is right, to some extent. States and cities are bending
backward to provide incentives for companies such as Amazon to set
up shop, yet the fact that these incentive programs attract
particular businesses does not mean they are conducive to economic
growth in general. States are better served through broad-based tax
cuts rather than incentive programs. Just like direct subsidies,
tax incentives and economic development zones, with their
preferential tax and development policies, distort sound business
decisions, place government in the role of picking winners and
losers, and undermine the rule of law.

New York is one of the worst offenders. According to Good Jobs First, since 1980 the Empire
State has offered more than $34 billion in 127,154 different
subsidy programs, far more than any other state. In subsidy dollars
per capita, only five states exceed New York, three of them blue
(New Mexico, Oregon and Washington state) and two red (Kentucky and
Louisiana). Apart from blue Hawaii, states with the lowest
subsidies per person are red or purple: the Dakotas, New Hampshire
and Wyoming.

New York is a typical blue state, with high taxes and
regulations on business, but Albany tries to compensate for those
disadvantages with targeted incentives. How well does this model
work compared to the red-state model of deregulation, right-to-work
laws and low taxes on labor and investment? In our biennial Cato
Institute study, Freedom in the 50 States, we have
found year after year that states with lower tax and regulatory
burdens — more economic freedom — see faster income
growth.

States are better served
through broad-based tax cuts rather than incentive
programs.

To be sure, red states indulge in corporate welfare as well, but
these states are less likely to have broad-based income and sales
taxes, which mitigates some of their ability to dole out special
favors using narrow exemptions and credits. But regardless of who
is adopting incentive programs — conservative or progressive
governments — they rarely make sense.

Why don’t tax incentives offset the disadvantages …read more

Source: OP-EDS

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