Tax Incentives: Benefit or Future Burden?

The fairness of tax system debate took an interesting turn this week as the European Commission ruled that tax deals granted to Starbucks and Fiat amounted to illegal state subsidies.  This could prove to be a landmark decision as countries have increasingly engaged in a "race to the bottom", where they offer dramatically lower tax rates and other incentives in return for large companies relocating part or all of their business to that country.  Countries due so with the hope of increased employment, tax revenue and other benefits.

Europe is not the only area where this phenomenon is occurring and this is by no means solely a recent phenomenon.  In 2001, Boeing engaged in a public auction as it looked to relocate its corporate headquarters from Seattle.  Chicago ultimately offered the most lucrative package, with the total value amounting to $56 million.  In the years since the Great Recession, feeling the sting of low growth, individual states offered increasingly aggressive packages in attempts to lure companies. In 2009, South Carolina won a Boeing 7E7 production line by offering a package estimated at $900 million dollars.

Supporters make clear the reasons they think these packages are justified.  Per the WSJ, "Proponents of corporate-tax subsidies said the incentives are a drop in the bucket, compared with the return to a state’s economy."  These supporters argue that to truly understand the benefits, you need to look at the overall rate of return, not just what the package costs.

However, as competition for these companies has increased, so has the size of the financial packages, which are beginning to cause a drag on state's budgets. The WSJ states, "in Oklahoma, where officials are grappling with a $300 million budget gap, Jeff Hickman,a Republican and speaker of the state House of Representatives, is calling for greater scrutiny of the $1.7 billion he said the state gives away each year on tax credits, incentives and exemptions."  A program that was sold to the public as increasing jobs could in reality be increasing the budget deficit and thus negatively affecting citizens.

The upshot is that citizens should always be wary of programs whose benefits are based on uncertain and fuzzy direct and indirect benefits.  States should continue to improve the business climates in their states and look for creative ways to attract investment.  However, they must also be more objective and transparent on projected benefits to ensure that voters can understand the true costs of such incentive packages and that future citizens are not saddled with heavier tax burdens.