Policy Documents

The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth

Jonathan Williams, Will Freeland and Ben Wilterdink –
July 25, 2014

State policymakers who are trying to make their states more tax competitive often are making their tax systems worse by engaging in "tax cronyism," or exceptions in the tax code that allow specific individuals, firms or industries to pay lower taxes than the statutory rate. In this new report, the American Legislative Exchange Council details the pitfalls and false choices presented by tax carve-outs and conducts an extensive review of tax cronyism in the 50 states.

The report provides a deep analysis of tax carve-outs and shows they are built on a false premise that they are an effective policy tool for promoting economic growth. The authors show how many of these carve-outs result in harmful economic distortions that, on net, discourage economic growth and encourage "rent seeking" and, many times, political corruption. 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.