Tax Incentive Goose, Meet Subsidy Gander

October 20, 2008

Tax Incentive Goose, Meet Subsidy Gander

The insantiy of Missouri’s tax incentive system is slowly becoming more apparent, though I have no confidence that, in this case, realization will lead to corrections. According to an article in Missouri Lawyer’s Weekly, the city of Saint Louis recently raised the issue of tax incentives at a board meeting of the East-West Gateway Council of Governments. (Unfortunately, we can’t link to the article, because it is subsciption-based — so you’ll have to trust us on the language.) From the article:

Slay spoke about the decision and questioned whether tax breaks and credits should be given for projects that end up attracting jobs from another Missouri city in the same region at a July 30 meeting of the East-West Gateway Council of Governments board.

The exact cause of the discussion was the move by the Armstrong Teasdale law firm from downtown to Clayton, to a development project being built with enormous subsidies by the state, county, and Clayton. But the issue is much bigger than one corporate relocation, as troubling as the move is for the downtown area. Examples in which tax money is used to help companies move from one Missouri city to another are numerous. Clayton, itself, was victimized by this game a few years ago when tax incentives helped Smutfit-Stone move its headquarters to Creve Coeur. And it seems peculiar for the city of Saint Louis to be complaining about tax incentives offered by Clayton when Saint Louis recently came very close to luring Centene to move downtown, thereby leaving Clayton, by offering significant tax incentives.

The solution is to stop handing out tax incentives entirely — no exceptions. “But, David, that would put Missouri at a disadvantage when competing with other states,” say the economic development officials. Perhaps, but if we created an overall business environment better than other states, then we would offset that. We could lower the state corporate income tax, eliminate the payroll tax in Saint Louis city, reduce occupational licensing even further, and more. We already passed tort reform, and that has been a great success. The key is to stop allowing tax dollars to be used when a government decides it wants a certain business in a certain place, rather than allowing markets to make those decisions. We have written extensively about this here at the Show-Me Institute.

Not every local government plays this game, but most do. If the city of Saint Louis really wanted to, they could follow the lead of Saint Charles County and refuse to use TIFs and other tax abatements. It is indeed insane that Sunset Hills gives tax incentives for businesses to leave Crestwood, but it happens all the time — and the city of Saint Louis has done it, too. You need to be against it when it favors you, as well as when it hurts you.

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5 Comments »

I strongly disagree with the Show Me Institute anti-tax incentive platform. I read this post, and the two articles linked within. I remain unconvinced. I am in favor of anyone not paying taxes, any where, any time, for any reason. I understand the logic that if the state budget stays constant and one entity stops paying taxes, the relative burden for everyone else increases. so what? I will quote the same logic of the post “You need to be against it when it favors you, as well as when it hurts you.”
In this case “it” being taxes. if its bad for someone other than you to get a tax break, then it must be good for everyone *besides* you to have a tax increase. in that case, SMI should clearly be trumpeting any new tax that doesn’t directly fall on their member’s shoulders, which is a strange place for a free-market think tank to be.
I will always favor someone not paying taxes, even if it marginally increases my own burden. In fact I would prefer the logical extreme, where I was the *only* taxpayer surrounded by free-riders, over the situation where everyone pays taxes.
even if tax incentives look like govt manipulation, the fact of the matter is that even if only one entity is enjoying the benefit, that is still a slightly more free market environment than the alternative.
I dont know much about SMI beyond the fact they have a great book club, but if anyone in power is actually listening to you, then I recommend you present a unified front in favor of reduced taxes in any circumstances.

Comment by vroman — October 21, 2008 @ 5:57 p.m.
I have sympathy for this view, and I used to make pretty much the same argument: If somebody manages to get out of paying taxes, we should feel happy for them, not force them to pony up like everybody else.

But your impression that we argue against development tax credits because “its bad for someone other than you to get a tax break” is mistaken. The opposition here takes a couple of forms:

1. Officials use economic development tax credits with the goal of boosting the local/state economy, and our job is to point out that this strategy doesn’t work. Regardless of the morality of tax credits, using them to pick and bolster specific businesses at the expense of others will fail, on aggregate, to produce economic benefits at a greater rate than if tax rates remained relatively low and consistent for all businesses. So, that’s what we argue would be a successful economic development strategy: lower tax rates across the board.

2. It’s unjust to raise the marginal tax rate for all the other people who still have to pay, in order to finance a break for a selected party. Notions of justice are tricky, and not everybody who agrees about the economics here will agree about which tax policy maximizes justice, or utility. But even though you’re OK with a hike in your own tax rate in order to pay for somebody else’s credit, how can you unilaterally say that everybody else should be OK with it too? Not only for themselves, but for their friends, family, neighbors, etc.? Especially when it’s used as the rationalization for an economic plan that won’t work? That’s a strange place for a libertarian to be.

I’m not sure which philosophical concerns motivate your particular brand of libertarianism, but I don’t think that select tax breaks coupled with raised rates for others can be seen as a more successful strategy for minimizing coercion than lowering tax rates for everybody at an equal rate. And we don’t have any anarchists working at the Show-Me Institute, to my knowledge, so a blanket opposition to all taxes, in any circumstances, would be a non-starter. The belief that some level of government should exist *almost* by definition implies a necessary level of taxation, however small. (Although there’s always the variant of minarchy that insists voluntary donations will cover necessary, legitimate government expenditures.)

Opposition to development tax credits isn’t even a controversial position for most libertarians — from Cato to the Mises Institute, to Wichita Liberty. And I’m sure you won’t be swayed by their arguments either, but even your pals at Anti-State.com aren’t all on the same page about this.

So, I get where you’re coming from, but it’s not the only libertarian position. Or, even, the obvious libertarian position.

Comment by Eric D. Dixon — October 21, 2008 @ 11:44 p.m.
1. if you got to choose between A) selective tax credits or B) proportionally lower taxes across the board, then yes, clearly B) is superior. however thats not the choice being presented. you either get A) selective tax credits or B) status quo. in that case I am saying option A) is better.
my point is if govt ever considers lowering taxes for anyone for any reason, you should seize on that and say, “yes govt, thats brilliant! lower taxes for somebody! great job!” and not point out its flaws, bc then if they listen to your criticism, that will not push them to lower taxes in general, they will just end up not de-taxing anyone. even if this does not “help” missouri, at least the precedent is set, so that every time some company is considering moving here, they get a tax break as well. theoretically then in the long run, as the mobility rate increases, eventually no corporation will pay taxes in MO.

2. “It’s unjust to raise the marginal tax rate for all the other people who still have to pay, in order to finance a break for a selected party”
if thats your position, then you can’t be for any tax break that is not completely universal, any time. lets say govt decides to lower the tax rate for ppl who make less than $300k/yr. well that increases the relative burden for the 1% of ppl who make $300k/yr+! govt is selectively favoring the non-rich!
in fact, the tax system is so convoluted, I dont even know if theres a single piece of legislation *possible* that would simultaneously and proportionally reduce the rate for every single individual and corporation. so youve cornered yourself into a position where its impossible for you to ever be in favor of lower taxes.
your position is the same as ppl who dont like socialism, yet dont want to cut social security. “they can cut it as soon as I get mine”. somebody has to be the first generation to take the big loss to eliminate the program. I volunteer. and I volunteer everyone my age along w me. sorry.

Comment by vroman — October 22, 2008 @ 9:30 a.m.
The cornerstone of the 1981 Reagan tax cuts was a simple, 25% across-the-board tax rate cut for all Americans, no matter what bracket they were in. While other aspects of the legislation may have been more complicated, the essence of it proves it is indeed possible to have a fair and substantial cut for everyone.

I fully agree with vroman on social security and will gladly give up all accumulated benefis right now in exchange for a stop on the tax for me going forward. I would even agree, in order to be part of the generation that makes the change, to end all benefits to me in exchange for a continuation of my tax going forward at a reduced rate. Now that is really a no-lose proposition for the government.

Comment by David Stokes — October 22, 2008 @ 11:18 a.m.
“thats not the choice being presented.”

Both dichotomies are wrong — nobody is presenting us with choices A or B, pick one or the other. Our role as a research institute is to map out a long-term road to maximizing economic freedom, and that road includes broad-based tax cuts — so we write about why that’s a better solution to the problem that politicians are ostensibly trying to tackle. And, as David pointed out, sometimes those solutions actually get implemented.

If we were to approve of targeted economic development breaks, the only practical message that politicians are likely take away is that it’s a good idea to dole out special favors to the politically connected. And those sorts of favors usually take a more insidious form than tax cuts.

My statement about justice is a blanket ideal, true, but like all broad ideals, I consider it a general guideline rather than a fixed equation from which other principles are strictly derived. I’d rather try to minimize injustice where possible, so I’d argue for the value of tax cuts that are as broad as possible, even if they’re not perfectly broad. Development tax breaks don’t even come close.

There are some tax credits that we’ve written favorably about, though, like those for private school tuition for both autistic students and everyone else, or community charities. These tax credits fail the narrow “perfect justice” test just as much as economic development credits would, but are still worth implementing in the long-term sense that they may reduce other forms of government action. If fewer kids have to be educated in failing public schools, and successful private charities cause government officials to feel less pressure to ramp up wasteful social service programs, then that’s the type of tax credit that does a better job of minimizing coercion and injustice even if the marginal rate goes up a little for everybody else.

And you keep framing the motivation incorrectly: “your position is the same as ppl who dont like socialism, yet dont want to cut social security. ‘they can cut it as soon as I get mine’”

My views here don’t have anything to do with my own tax bill, or the Show-Me Institute’s. I’d make the same arguments even if I was the one exception to the broad-based tax cuts I favor, and my own burden would be guaranteed to increase.

Comment by Eric D. Dixon — October 22, 2008 @ 2:15 p.m.

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I strongly disagree with the Show Me Institute anti-tax incentive platform. I read this post, and the two articles linked within. I remain unconvinced. I am in favor of anyone not paying taxes, any where, any time, for any reason. I understand the logic that if the state budget stays constant and one entity stops paying taxes, the relative burden for everyone else increases. so what? I will quote the same logic of the post “You need to be against it when it favors you, as well as when it hurts you.”
In this case “it” being taxes. if its bad for someone other than you to get a tax break, then it must be good for everyone *besides* you to have a tax increase. in that case, SMI should clearly be trumpeting any new tax that doesn’t directly fall on their member’s shoulders, which is a strange place for a free-market think tank to be.
I will always favor someone not paying taxes, even if it marginally increases my own burden. In fact I would prefer the logical extreme, where I was the *only* taxpayer surrounded by free-riders, over the situation where everyone pays taxes.
even if tax incentives look like govt manipulation, the fact of the matter is that even if only one entity is enjoying the benefit, that is still a slightly more free market environment than the alternative.
I dont know much about SMI beyond the fact they have a great book club, but if anyone in power is actually listening to you, then I recommend you present a unified front in favor of reduced taxes in any circumstances.

Comment by vroman — October 21, 2008 @ 5:57 p.m.

I have sympathy for this view, and I used to make pretty much the same argument: If somebody manages to get out of paying taxes, we should feel happy for them, not force them to pony up like everybody else.

But your impression that we argue against development tax credits because “its bad for someone other than you to get a tax break” is mistaken. The opposition here takes a couple of forms:

1. Officials use economic development tax credits with the goal of boosting the local/state economy, and our job is to point out that this strategy doesn’t work. Regardless of the morality of tax credits, using them to pick and bolster specific businesses at the expense of others will fail, on aggregate, to produce economic benefits at a greater rate than if tax rates remained relatively low and consistent for all businesses. So, that’s what we argue would be a successful economic development strategy: lower tax rates across the board.

2. It’s unjust to raise the marginal tax rate for all the other people who still have to pay, in order to finance a break for a selected party. Notions of justice are tricky, and not everybody who agrees about the economics here will agree about which tax policy maximizes justice, or utility. But even though you’re OK with a hike in your own tax rate in order to pay for somebody else’s credit, how can you unilaterally say that everybody else should be OK with it too? Not only for themselves, but for their friends, family, neighbors, etc.? Especially when it’s used as the rationalization for an economic plan that won’t work? That’s a strange place for a libertarian to be.

I’m not sure which philosophical concerns motivate your particular brand of libertarianism, but I don’t think that select tax breaks coupled with raised rates for others can be seen as a more successful strategy for minimizing coercion than lowering tax rates for everybody at an equal rate. And we don’t have any anarchists working at the Show-Me Institute, to my knowledge, so a blanket opposition to all taxes, in any circumstances, would be a non-starter. The belief that some level of government should exist *almost* by definition implies a necessary level of taxation, however small. (Although there’s always the variant of minarchy that insists voluntary donations will cover necessary, legitimate government expenditures.)

Opposition to development tax credits isn’t even a controversial position for most libertarians — from Cato to the Mises Institute, to Wichita Liberty. And I’m sure you won’t be swayed by their arguments either, but even your pals at Anti-State.com aren’t all on the same page about this.

So, I get where you’re coming from, but it’s not the only libertarian position. Or, even, the obvious libertarian position.

Comment by Eric D. Dixon — October 21, 2008 @ 11:44 p.m.

1. if you got to choose between A) selective tax credits or B) proportionally lower taxes across the board, then yes, clearly B) is superior. however thats not the choice being presented. you either get A) selective tax credits or B) status quo. in that case I am saying option A) is better.
my point is if govt ever considers lowering taxes for anyone for any reason, you should seize on that and say, “yes govt, thats brilliant! lower taxes for somebody! great job!” and not point out its flaws, bc then if they listen to your criticism, that will not push them to lower taxes in general, they will just end up not de-taxing anyone. even if this does not “help” missouri, at least the precedent is set, so that every time some company is considering moving here, they get a tax break as well. theoretically then in the long run, as the mobility rate increases, eventually no corporation will pay taxes in MO.

2. “It’s unjust to raise the marginal tax rate for all the other people who still have to pay, in order to finance a break for a selected party”
if thats your position, then you can’t be for any tax break that is not completely universal, any time. lets say govt decides to lower the tax rate for ppl who make less than $300k/yr. well that increases the relative burden for the 1% of ppl who make $300k/yr+! govt is selectively favoring the non-rich!
in fact, the tax system is so convoluted, I dont even know if theres a single piece of legislation *possible* that would simultaneously and proportionally reduce the rate for every single individual and corporation. so youve cornered yourself into a position where its impossible for you to ever be in favor of lower taxes.
your position is the same as ppl who dont like socialism, yet dont want to cut social security. “they can cut it as soon as I get mine”. somebody has to be the first generation to take the big loss to eliminate the program. I volunteer. and I volunteer everyone my age along w me. sorry.

Comment by vroman — October 22, 2008 @ 9:30 a.m.

The cornerstone of the 1981 Reagan tax cuts was a simple, 25% across-the-board tax rate cut for all Americans, no matter what bracket they were in. While other aspects of the legislation may have been more complicated, the essence of it proves it is indeed possible to have a fair and substantial cut for everyone.

I fully agree with vroman on social security and will gladly give up all accumulated benefis right now in exchange for a stop on the tax for me going forward. I would even agree, in order to be part of the generation that makes the change, to end all benefits to me in exchange for a continuation of my tax going forward at a reduced rate. Now that is really a no-lose proposition for the government.

Comment by David Stokes — October 22, 2008 @ 11:18 a.m.

“thats not the choice being presented.”

Both dichotomies are wrong — nobody is presenting us with choices A or B, pick one or the other. Our role as a research institute is to map out a long-term road to maximizing economic freedom, and that road includes broad-based tax cuts — so we write about why that’s a better solution to the problem that politicians are ostensibly trying to tackle. And, as David pointed out, sometimes those solutions actually get implemented.

If we were to approve of targeted economic development breaks, the only practical message that politicians are likely take away is that it’s a good idea to dole out special favors to the politically connected. And those sorts of favors usually take a more insidious form than tax cuts.

My statement about justice is a blanket ideal, true, but like all broad ideals, I consider it a general guideline rather than a fixed equation from which other principles are strictly derived. I’d rather try to minimize injustice where possible, so I’d argue for the value of tax cuts that are as broad as possible, even if they’re not perfectly broad. Development tax breaks don’t even come close.

There are some tax credits that we’ve written favorably about, though, like those for private school tuition for both autistic students and everyone else, or community charities. These tax credits fail the narrow “perfect justice” test just as much as economic development credits would, but are still worth implementing in the long-term sense that they may reduce other forms of government action. If fewer kids have to be educated in failing public schools, and successful private charities cause government officials to feel less pressure to ramp up wasteful social service programs, then that’s the type of tax credit that does a better job of minimizing coercion and injustice even if the marginal rate goes up a little for everybody else.

And you keep framing the motivation incorrectly: “your position is the same as ppl who dont like socialism, yet dont want to cut social security. ‘they can cut it as soon as I get mine’”

My views here don’t have anything to do with my own tax bill, or the Show-Me Institute’s. I’d make the same arguments even if I was the one exception to the broad-based tax cuts I favor, and my own burden would be guaranteed to increase.

Comment by Eric D. Dixon — October 22, 2008 @ 2:15 p.m.

October 20, 2008