Oklahoma Should End Targeted Tax Breaks

Published April 28, 2010

Oklahoma’s governor and legislature have been discussing ways to raise revenues to close a $1.2 billion state budget gap, and although this should set off alarm bells for those who believe government already takes too much from us, one proposal has merit: a one-year moratorium on certain income tax credits and repeal of a tax credit for some rural business venture investments.

The list includes tax breaks such as a new jobs credit and credits for biomedical research, zero-emissions electricity generation, and specialty canine training.

If lawmakers would consider permanently doing away with these and other credits, they’d really be on to something.

Targeted tax credits, rebates, and other manipulations of the tax system are bad policy no matter what. Here are a few reasons why.

One: A broad tax base usually results in more stable tax revenues, and targeted tax breaks and incentives narrow the tax base. The result is bigger swings in tax revenues as the economy goes through its ups and downs, and higher taxes for everyone except the lucky few who receive favored tax treatment. The fewer tax favors handed out, the lower tax rates can be for everyone.

Two: Tax favors usually have dismal results, costing states far more than they supposedly bring in. One example: film credits. Right now New Mexico is a film hotspot, but New Mexico State University’s Arrowhead Center has determined the state’s subsidy program generates only 14 cents for every dollar spent. The center’s 2008 study embarrassed the governor’s office, which responded with a study showing a 50 cent return on every dollar spent, only to have it debunked by the state’s Legislative Finance Committee, which also concluded the state’s film credits program is a money-loser. The increase in the state’s film industry is actually costing the taxpayers a big pile of money.

Three: Handouts invite more manipulation and corruption. Angling for taxpayer handouts is a big reason politics is awash in money. Paid lobbyists flood state capitols in hopes of winning new favors or expanding existing ones for their clients or reducing or ending tax favors for their clients’ competitors. Politicians benefit while the taxpayers take a beating.

Four: The fewer tax favors handed out, the fairer and more transparent the system. People have a clearer understanding of how the system works and more confidence it’s the same for everyone. Fewer bigwigs can game the system if tax credits aren’t available.

Five: A fairer, more transparent tax system makes for cleaner government. With no special tax favors to hand out, lawmakers can’t manipulate the system to benefit favored businesses, nonprofit organizations, friends, or relatives, nor punish people they don’t like. And lobbyists would have less incentive to throw money around in hopes of buying favors from lawmakers.

Undoubtedly thousands of people across Oklahoma would gnash their teeth at the thought of losing a tax credit or rebate they now enjoy. Narrow constituencies benefit from these credits, yet the costs are spread across all taxpayers, giving most people good reason to be cynical toward government.

A financial crisis presents lawmakers with a powerful incentive to examine priorities and set better ones. One of these should be to do away with tax favors that invite lobbyists and lawmakers to cozy up to each other, benefit a few at the expense of the many, and give citizens more reason to distrust government.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute in Chicago.