Within days of each other, California passed legislation granting generous tax breaks to the aerospace industry (specifically to Northrop-Grumman), and took major steps toward quadrupling tax credits for the State’s disappearing film industry (it’s close to a done deal). The tax incentives for Northrop-Grumman try to help the company gain military contracts to build the next generation of stealth bombers.
Using tax breaks to make industrial policy makes Swiss cheese out of tax systems. Doing it often enough erodes tax bases, loses revenue for states (even when the experts, and surely the lobbyists, tell you otherwise); and it makes the tax system less fair.
Even if tax giveaways “work,” in the sense of (temporarily) retaining or attracting business, there are eventually plenty of victims. Short of national policy to regulate tax preferences, which is of course unlikely and impractical for now, it’s hard to figure out how to curb bribery and black mail in the guise of tax policy. Public opinion has thwarted these efforts in some places. For example, Seattle said NO to the Supersonics’ and NBA’s demands for more public gifting, after burning out on Mariner, Seahawk and Boeing giveaways.
Here, generally, are some of the victims of industrial (tax) policy:
At the highest level, real, “free market” capitalism is a victim, supplanted by a form of “state capitalism” or “crony capitalism.” That may be the worst or broadest of the bad effects.
Governments refusing to play the game, lose business and jobs (at least in the short run). The Seattle Supersonics moved to Oklahoma City (OKC), when Seattle balked after OKC offered the moon. (Has losing the Sonics harmed Seattle’s economy?)
Where it’s hard to cut spending in tandem with the tax breaks – that’s the fiscally responsible thing to do — tax burdens shift to small business, less privileged industry sectors, and to ordinary households and property owners.
In places where it’s acceptable to cut core services or safety nets to compensate for tax giveaways, people who truly need them, suffer greatly. Look at Kansas right now as an example.
In California, corporate welfare and tax giveaways, without corresponding spending cuts, can result in higher taxes on the rich, but that option for saving core government services isn’t available in most other places.
Where it’s not feasible to raise taxes on the rich, all varieties of fees are increased, or new ones imposed, on everything, short of breathing. Special taxes may be raised on motor vehicle ownership, business licenses, hunting, other recreation, etc.. These charges are highly visible, surprising and annoying to taxpayers, and often regressive, which fuels more public opposition to taxes.
But governments usually don’t have to make these hard choices anyway. The tax breaks often don’t take effect for a few years; or the experts scoring the measures are pressured into saying they’re freebies. Indeed, doing it will make money for the state, they say. What a deal!
When governments do a lot of this, and the rosy outcomes don’t materialize, deficits and long term debt mount. The governments don’t actually pass deficit budgets (because that is usually illegal), but resort to smoke and mirrors. Or, as Letterman would say, “stupid pet tricks.”
Not fully funding pension obligations (now harder to do under new GASB rules), or shifting activities from operating to capital budgets, where you can pay for them with bonds (otherwise known as borrowing), are common ways to look like you’re (magically) balancing the budget, while giving away revenue to special interests, without cutting spending. It is, indeed, magic.
In the process we’ve turned tax codes all over the country into Swiss cheese. And we wonder why average citizens, small business, and less privileged or sainted industries, cry about taxation.
Total tax burden in the U.S., depending on how you measure it, has been stable or declining for thirty years, according to the non-partisan Congressional Budget Office (CBO). And the U.S. has lower taxes than most advanced industrial societies, according to a Forbes report. But it doesn’t feel that way to the average person, to many smaller businesses , or to industries that are not sacred cows.