August 28, 2005
New Book on Local Tax Breaks
When I first started the new book by Greg LeRoy, The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation (Berrett-Koehler 2005), I thought --"Darn he has written the book I wanted to write." His thesis is that the competition among states and local governments for business operations is ubiquitous and damaging. Overall states and cities surrender over $50 billion a year in a multitude of tax breaks (30 or so per state) that has resulted in corporations paying less than 5% of total state tax revenues, one half of what corporations paid in 1980.
Why do local governments do it? They claim to trade off increased job creation and increased income taxes levied on the new jobs with the corporate level of tax conceded. LeRoy says the deal is a phony. He estimates that 96% of the tax breaks are windfalls, that is, 96% of the corporations would locate where they decide to locate without the tax relief.
Then he loses me -- my book would be different here -- he argues that the tax relief is self-defeating. His argument -- Corporations undercut the revenue base of their habitat and worsen the business climate of their operating locales, raising the cost of operating. I believe that what is happening is a back door elimination of an irrational double tax system on corporate earnings (although only at the state level). Eliminating the double tax on corporations is a good thing; this method is suboptimal,however, because it is randomly applied only to companies that can create credible threats to relocate.
The right book on the subject has yet to be written. My recommendation for governors: Eliminate all taxes unique to corporations (corporate income tax, or corporate revenue tax), stick to and enforce taxes that corporations should pay on the same rates as individuals for the same economic activity (because they own real property or make purchases, for example), make any subsidies transparent, time-limted, expressly conditioned, and returnable if the conditions are breached.
August 28, 2005 | Permalink
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