It’s Time to End State Tax Giveaways

Published November 1, 2004

A few years ago, hotel giant Marriott International “hinted” that it was looking to move its headquarters out of Maryland’s Montgomery County. Virginia politicians sprang into action, offering Marriott $6 million to cross the Potomac River. Fearing the loss of 3,000 high-paying jobs and a high-profile employer, Maryland countered with $58 million worth of incentives to stay.

It turns out Marriott never was really interested in leaving Maryland. But the firm received a windfall for staying put.

With states still reeling from falling tax collections, here’s an idea: End the practice of granting tax incentives to individual corporations as a means of fostering economic development.

Incentives Have Proliferated

Public finance experts long have criticized such targeted tax incentives as violating all the established principles of sound tax policy. Yet these incentives have proliferated over the past quarter-century. Hundreds of companies have received tax breaks worth billions of dollars. Alabama–a leader in the use of incentives–has granted Mercedes Benz more than $250 million in tax relief.

Some of this is understandable. Politicians want to encourage investment and create jobs, and they believe the most expedient way to do so is to lure companies through tax concessions. Politicians also don’t want to lose jobs. A company that is talking about leaving–as Marriott did–is sure to be offered tax breaks to stay.

Aware of this dynamic, corporations have used an army of consultants to broker deals for tax incentives. Essentially, corporations have learned to “game” the system.

When it comes to spurring economic growth, incentives are seen as the quick fix. Other ways of attracting companies–creating better schools and transportation systems, for example–take years to develop. Tax incentives can be pushed through the legislature lickety-split, and then, just as quickly, the governor and legislative leaders can be standing at a ribbon-cutting ceremony announcing a new manufacturing plant that will employ hundreds of citizens.

Poor Policy Choice

Its political allure notwithstanding, the targeted tax incentive is a poor policy choice.

First, and most important at this time of tight state budgets, targeted tax incentives cost a lot of money. Even conservative estimates place the lost tax revenue at billions of dollars over the past decade. Curbing or ending their use could balance the budgets in many states.

Second, such incentives are unnecessary. Corporations are far more interested in access to markets, an educated workforce, and labor costs than they are in state tax burdens. As former U.S. Secretary of the Treasury Paul O’Neill said during his confirmation hearings, “I never made an investment decision based on the tax code. Good business people don’t do something because of [tax] inducements.” O’Neill led corporate giants International Paper and Alcoa.

Third, tax incentives are patently unfair. Typically, a corporation is offered significant tax breaks for creating a certain number of jobs and investing a certain amount of money in the state. But what of the companies that have already created jobs and invested money? They receive nothing. Similarly, corporations that threaten to leave a state often receive tax breaks for staying put. But what of the companies that do not have the nerve or guile to threaten to leave? The companies and individuals not receiving concessions end up paying more to make up for the tax revenue lost.

Fourth, tax incentive programs suffer from a lack of accountability. Neither the public nor most political leaders know if the corporations are doing what they promised. There are often no guarantees the recipients will create good-paying jobs or that a company won’t close down the operation a year or two later.

Under the tax incentive system, government action is prompted by fear of losing jobs to other states, dubious promises, and empty threats. The system prompts companies that do not receive incentives to lobby legislatures for similar breaks. And the incentives run roughshod over the ideal that government should minimize its presence in the marketplace.

Competition among the states, based on low tax burdens and good public services, is a good thing. But providing tax breaks to particular companies in return for a promise of doing what most companies would do anyway violates all notions of good government. Ending the practice would result in a fairer, more efficient, and more accountable public finance system. It might just save states a little money as well.

David Brunori ([email protected]) is research professor of public policy at George Washington University. This article is reprinted by permission from the August 2003 issue of Governing magazine.

For more information …

on tax incentive programs, see The Heartland Institute’s free online research database, PolicyBot™. Nearly two dozen documents are available there on the topic Economic Development, subtopic Bidding for Businesses.