Tax incentives have long been a pet peeve of mine. In the name of attracting economic development, states are willing to grant all sorts of tax breaks, sometimes with seemingly joyful abandon. To be sure, I am the first person to admit that not all tax incentives are evil. Tax incentives meant to attract businesses and individuals with the aim of revitalizing blighted areas in a city come to mind when considering the positive side. These incentives granted to companies to locate or relocate in a specific area can result in a region’s overall economic growth by attracting other businesses taking advantage of the new opportunities that arise because of the company’s presence. If implemented responsibly, there is no reason to outlaw the use of tax incentives for purposes of economic development.
However, the fact that tax incentives can be used for good does not negate the inherent unfairness in them. Businesses and individuals granted tax incentives receive the same services as other businesses and individuals, but pay less for them. In fact, they may not pay anything at all, as in the case in which a business receives a 25-year property tax abatement. No one could argue with a straight face the fairness of this situation. In certain circumstances, tax incentives could run afoul of the 14th Amendment’s equal protection clause. Business competitors identical in all respects except that one is paying less in taxes because of tax preferences could leave the government entity that granted the break vulnerable to a lawsuit by the non-favored business.
Targeted tax incentives, which are intended to spur economic growth that otherwise would not have occurred, are worse. Aside from creating business compliance and government enforcement problems, studies have shown that targeted incentives do not work, and may even cause harm. The job creation and other regional economic benefits that justified granting a tax boon to a business do not always materialize, leaving the state worse off than it was before. Or if the promised jobs do materialize, they may be filled by outsiders — to the detriment of the state’s homegrown population. The influx of new residents could also force governments to upgrade existing transportation infrastructure to accommodate the increased traffic, and the increased taxes generated by the new residents' jobs and purchases may not be enough to offset the cost. When this happens, the revenue lost to tax incentives, which provides services to businesses and individuals, must be made up elsewhere. To do that, governments might have to raise taxes on other non-preferred taxpayers or cut needed services to businesses and individuals. Even more egregious is that a business insisting on tax incentives might have moved to the jurisdiction anyway without them — the deal is nothing more than a government shakedown.
What galls me about targeted tax incentives, though, is the lengths to which state and local governments will go to persuade a business to locate in their jurisdiction. It’s not just the outlandish monetary and other promises offered, although that’s bad enough. Call me a snob, but I believe governments should present a dignified demeanor when interacting with nongovernmental entities. In recent times, the antics states and localities have engaged in to lure businesses to their jurisdictions are downright cringe-worthy. The bidding war launched by Amazon’s search for a second headquarters is a prime example. One local government offered to establish a city called Amazon, calling it a branding opportunity. Another sent Amazon a 21-foot saguaro cactus. The mayor of a third city wrote 1,000 five-star reviews about Amazon products, which included slick one-liners about how great a place his city would be for the retailing behemoth to locate its second headquarters.
In the end, tax incentives are nothing more than giveaways to preferred taxpayers. If governments insist on using them for economic development, the least they can do is use them responsibly. Will it ever happen? Well, as a friend of mine would say — “good luck with that.”