With hundreds of thousands of North Carolinians out of work and millions fearful about their futures, state and local policymakers are about to encounter a parade of companies, industries, and special-interest groups asking for targeted tax breaks and other handouts.
They should say no. Making North Carolina a more attractive place to live, work, shop, invest, and create businesses must be a high priority. But secret deals and preferential treatment are the wrong tools for the job.
While they butt heads on other issues, conservatives and progressives ought to agree on this. Company A ought not to confront a higher tax burden than Company B simply because some politicians think Company B is a better “investment.” They are no position to know that. We the voters don’t put them in office so they can act as venture capitalists. They possess neither the expertise nor the information to play that role well. Even the attempt invites corruption and adverse economic consequences.
Legitimate governments are authorized to collect taxes only to pay for core public services. If our elected representatives think more revenue is needed to provide the necessary quantity and quality of services, they should raise the tax rate. If they think government should do fewer jobs, or can do the same jobs more efficiently, they should lower the tax rate.
That is, they should raise and lower taxes for all households and businesses in like circumstances. They shouldn’t play favorites.
Consider this thought experiment. Let’s say you live in a small coastal community. The town council decides that it would be a good idea to attract a certain billionaire to build a vacation home there. They know she will build big and ornate, employing lots of workers, and will spend freely on other goods and services once she’s a resident. She will also likely make large gifts to the hospital, the university, and other local charities.
So the town council votes to exempt her from property taxes for 20 years if she will build her beachfront mansion there. She readily agrees. How would you feel about having to pay your property taxes while she pays none?
Some defenders of selective tax breaks say they aren’t subsidizing a recipient company. They’re just allowing the company to keep more of their own revenues. Of course, lowering taxes isn’t a subsidy in conceptual terms. But if you lower taxes selectively and then continue to deliver public services universally, you are making some households and businesses pay more than others for the same services. You are making them cross-subsidize the recipient of the tax break.
Defenders of selective tax breaks also routinely say that while they find the policy unappealing or even unjust, they have no choice. Economic development is a bidding war. If you don’t pay, you can’t play. Businesses will go elsewhere.
A few might, yes. But policymakers should look at overall economic effects, not just whether a particular firm or industry relocates. In careful studies of selective-incentive policies, researchers usually find either no net benefits or net economic harm, even if incentives can reasonably be credited with recruiting a particular clump of jobs to a particular place.
Some scholars believe state and local taxes don’t affect economic decisions much, anyway, and targeting the tax relief doesn’t make any difference. Other scholars distinguish between broad changes in tax burdens or marginal rates, for which they do find important economic effects, and targeted incentives, which have nil to negative effects.
How could this be? Well, playing favorites is risky. Those who don’t get special treatment may be angered and go elsewhere, including entrepreneurs starting businesses that might be small at first but later grow to be large spenders and employers. And if a favored project goes south — because, after all, politicians lack both the information and the incentives to “bet” well — other businesses may be left holding the bag for expanded services without an adequate tax base to finance them.
On economic policy, consistency is a virtue.