Audit Confirms What Show-Me Institute Scholars Have Said All Along: Tax Credits Are Overhyped
On Monday, Missouri State Auditor Susan Montee released a study of tax credit cost controls. The audit’s conclusions have been covered by the media, as well as on Show-Me Daily. The audit seems to affirm much of the Show-Me Institute’s scholarly work on tax credits; it reports that the economic impact of tax credits is routinely overestimated and their costs underestimated. Some key findings from the audit are outlined below:
Fiscal Notes
Fiscal notes tended to understate the cost of tax credits, some of which underwent further expansions after their initial passage. Of the 15 tax credits reviewed, the fiscal notes underestimated their total cost by $1.1 billion over a five year period. This is not surprising given the tendency that Show-Me Institute research assistant John Payne noted for politicians to overestimate the impact of their policies and underestimate the costs.
Four of the five tax credit programs for which fiscal notes underestimated the amount that the credits would disperse were new. They had lower participation than expected, as well as annual limits on the amount that could be redeemed. (See page 8 of the audit for a table displaying the projected and actual costs for all 15 of these tax credit programs.)
The audit notes that the short time frame — three years — of the cost estimates limits their ability to predict long-term effects. On the flip side, the audit also notes that even longer estimates are inaccurate and unable to predict true costs. Given that the fiscal notes had poor predictive power, the audit suggests that limits and sunset clauses may be necessary methods to limit the costs of tax credits.
Annual or Cumulative Limits
Annual or cumulative limits cap the amount of tax credits that can be redeemed from any particular program. This is one measure that the audit suggests be put into place for all tax credits, although 23 of the 53 programs redeemed in 2009 did not have annual or cumulative limits.
Some tax credit programs have seen their limits increased substantially, like the Missouri Quality Jobs program, which initially had a $12 million annual limit and currently has a $80 million limit. Officials’ ability to increase these limits through committees or departments, without having to go through the full legislative process, circumvents the purpose of limits.
Sunset Provisions
In 2003, Missouri passed the Sunset Act, which stipulated that each program must be reauthorized after six years. This allows the economic impact to be evaluated before further extensions are granted. Of the 18 tax credit programs passed after 2003, only 10 have sunset provisions. The audit suggests that sunset provisions be included in every new tax credit.
Conclusions From the Audit
Sunsets and both annual and cumulative limits could substantially control the cost of tax credits. As the audit points out, it is difficult to predict the long-term effects of specific tax credits; with a sunset provision, the effects are reviewed and evaluated before a program is continued. Annual and cumulative limits would hold tax credits to the amount specified by the bill, which would discourage underestimates as well as control tax credit expenditures. Currently accounting for 7.8 percent of the 2009 Missouri budget, tax credits will continue to grow if cost-control measures are not better implemented.
How has the legislature responded to the audit’s pronouncement on tax credits? The speaker of the House issued a press release disagreeing with its conclusions:
“Auditor Susan Montee and Governor Jay Nixon are playing a dangerous and damaging political game creating a fictitious conflict between education and Missouri jobs. Education and economic development are mutually beneficial, not mutually exclusive,” [the speaker] stated. “In the House, we have always welcomed independent, objective scrutiny on how to best reform and enhance tax credit programs. Missourians need jobs. Therefore, the Missouri House will continue to protect responsible economic development programs that create those jobs. And we will have the last word on this matter.”
With all of the evidence that tax credits cost more than anticipated with less impact than predicted, greater scrutiny is warranted before the state considers passing any further credits. The audit brings to light important issues that proponents of tax credits must face in order to bring greater fiscal responsibility to Missouri’s budget.
Aside from the audit’s careful consideration of the unforeseen costs that tax credits entail, it’s also important to consider some of the broader economic reasons that such targeted industry credits are not as effective as their proponents suggest. As Show-Me Institute scholars have repeatedly pointed out, tax credits are less efficient than lower tax rates, both because legislators have no special talent for picking winners and losers in the economy, and because the credits distort economic incentives, causing a misallocation of capital — subsidized producers have an incentive to produce more than is efficient, and some other set of unsubsidized goods or services are slightly underproduced as a result.
Perhaps this audit will encourage a the legislature to consider lower tax rates in lieu of inefficient tax credits.
I find it very interesting that you edited someone else’s article to remove the phrase “Richards stated” and replace it by “[the speaker]” stated without even noting that you had edited the excerpt for whatever reason you edited it. I don’t like Richards much either but is there a reason why you don’t want to use his actual name?
Comment by Eapen Thampy — April 29, 2010 @ 1:28 p.m.
Yes, Eapen, and it’s the SAME reason we stated before: we are about ideas, not people.
Comment by Caitlin Hartsell — April 29, 2010 @ 1:30 p.m.
Then the appropriate way to make that edit is to make a formal note that you are editing someone else’s work with the notation as to why. Otherwise you are misrepresenting the content of someone else’s work.
Why aren’t you 100% consistent with this? Why not just not use Montee’s name or Nixon’s name and say the “auditor” or “the governor”?
This policy of yours is very strange, particularly since your founder, Rex, has given money to Richards in the past.
Comment by Eapen Thampy — April 29, 2010 @ 1:34 p.m.
Why do you choose to comment on style, rather than substance?
Comment by Caitlin Hartsell — April 29, 2010 @ 1:37 p.m.
Why aren’t you defending misrepresenting someone’s work? That is the more serious substantive issue to me.
Comment by Eapen Thampy — April 29, 2010 @ 1:39 p.m.
Eapen, this is a blog post, not a formal academic paper. I noted that I did edit it when I included the brackets around [the speaker] in place of his last name. I’m sorry you disagree with it stylistically, but I did include the link to the actual article. Obviously, you were able to find the “original” wording fairly quickly.
When I criticize someone, I tend to take their name out of the argument because it makes it less personal. It makes it about the ideas. Criticizing ideas rather than the people making them makes for a much stronger argument.
Comment by Caitlin Hartsell — April 29, 2010 @ 1:56 p.m.
Square brackets are the editorial symbol for an alteration to quoted material. It’s absolutely standard; almost any newspaper, magazine, or journal you could name uses them.
There are many reasons to use them. In this case, it could be that simply using the name “Richards” is insuffucient for a first reference within a piece. In that case, one would place his title and first name within square brackets to create a complete first reference within a quoted passage that has only an incomplete subsequent reference.
This could also be a reflection of Show-Me Institute policy, which predates my own employment here, that as often as feasible when we have critical things to say, we often — even usually — avoid using the names of the people whose ideas we’re criticizing, for exactly the reasons Caitlin identified. We educate the public about policies and ideas, not personalities.
You’re really barking up the wrong tree here.
Comment by Eric D. Dixon — April 29, 2010 @ 2:00 p.m.
Eapen,
Our standard practice is to avoid calling out by name individuals of whom we are critical. We have adhered to this policy for years, and we do this to emphasize that it is the policy or idea that we wish to criticize, not the person. It is absolutely not uncommon to substitute a phrase (such as [expletive deleted] or some other modification of words that the author does not find it useful to quote directly) when quoting what someone else has said or written. The very fact that the modified phrase is put in brackets puts the reader on notice that a non-substantial alteration has been made. Given that we have provided a link to the original statement, any reader who wishes may confirm the original statement – and may point out if we have somehow failed to convey the same idea as was contained in the original.
Comment by Dave Roland — April 29, 2010 @ 2:01 p.m.
You’re missing the point. Square brackets are necessary but not sufficient because I don’t know if you made that edit or if it is part of the original text. That’s why it’s necessary to at the very least provide notation that it is YOUR edit and not something contained in the original work. Simply linking to the original work is not sufficient to clear this up; it shouldn’t be the reader’s job to clarify that point.
I really don’t mean to be a jerk and I thought that the rest of your work is pretty good. But the citation issues undermine the quality of your scholarship.
Comment by Eapen Thampy — April 29, 2010 @ 2:22 p.m.
You’re simply incorrect.
Comment by Eric D. Dixon — April 29, 2010 @ 2:23 p.m.
I find this ongoing debate about blogging style humorous. There is no “official” blogging style, or even a style guide. And as most people seem to forget, a style guide is a guide to style. Even a dictionary is nothing more than a compilation of common usages. I would go on with a rant about why I think writers should think of a dictionary as more of a lexicon than a rule book, but I am already starting to digress. Blogging is a new form of communication. Therefore, if your point is made and people understand it, than you have accomplished something. If your idea is bogged down with a bunch of dribble, but is stylistic correct, what is the point? – BRH
Comment by Brian R. Hook — April 29, 2010 @ 9:53 p.m.
Earlier today, I showed this comment thread to a coworker who hadn’t seen it before, for lols, and remembered that I wanted to say just a little more. When I wrote my responses above on April 29, I was posting them from my cell phone at the New Orleans Jazz Fest fairgrounds. If I’d been at the office, I would have cited style guide chapter and verse.
I’m at the office now, style guide in hand, so here goes:
The Chicago Manual of Style: The Essential Guide for Writers, Editors, and Publishers, The University of Chicago Press, 15th ed., p. 267.
Use of square brackets. Square brackets (in the United States usually just called brackets) are used mainly to enclose material—usually added by someone other than the original writer—that does not belong to the surrounding text. In quoted matter, reprints, anthologies, and other non-original material, square brackets enclose editorial interpolations, explanations, translations of foreign terms, or corrections. Sometimes the bracketed material replaces rather than amplifies the original word or words. For brackets in mathematical copy, see 14.25. See also 11.66–68.
“They [the free-silver Democrats] asserted that the ratio could be maintained.”
“Many CF [cystic fibrosis] patients have been helped by the new therapy.”
Satire, Jebb tells us, “is the only [form] that has a continuous development.”
[This was written before the discovery of the Driscoll manuscript.—Ed.]
If quoted matter already includes brackets of its own, the editor should so state in the source citation (e.g., “Brackets in the original”); see 11.70 for an analogous situation with italics.
Comment by Eric D. Dixon — June 25, 2010 @ 5:16 p.m.
[...] from $372 million in 2001 to over $584 million in 2009, an increase of 57%. Between 2005 and 2009, tax credits grew from 5% of the budget to 7.8% of the [...]
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