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Tax Policy More Than Incentives Impact Economic Development

A note for our readers: the views reflected by the authors do not reflect the views of ASPA.

By David Robinson

Toyota made headlines recently with a move and consolidation of its facilities from California, Kentucky and New York City into one North American headquarters in Plano, Texas. These 3,600 jobs are a major economic development prize. In a 2014 article titled, “Plano approves $6.75 million grant and other incentives for Toyota,”  the Dallas Morning News reported the state offered a $40,000,000 grant from the Texas Enterprise Fund and the City of Plano offered a $6,750,000 grant and $8,500,000 tax abatement only if the company develops a $350,000,000 hundred acre campus and hire the employees as promised. The use of the Texas and Plano “closing fund” to lure the Toyota project caught all sorts of headlines—both good and bad.

What most of the news stories missed was that the Texas incentive offer, while generous and helpful, was not the likely the most important factor impacting Toyota’s decision. Any city and state Toyota moved their facility to would have offered millions of dollars of tax incentives. Some might argue the Texas incentive offer is relatively low when compared to others.

robinson mayIn March of this year, Dale Buss of Forbes noted Nissan received an $182,000,000 incentive to consolidate operations in Tennessee back in 2005 and create 1,300 jobs in the Volunteer State. The fact is economic development incentives will follow economic expansion. Local and state governments working with their private sector partners all play in the tax incentive game.

However, economic development incentives are only temporary and rarely, if ever, offer more in incentives than a company and its employees will pay in taxes. In the case of Toyota, Buss wrote the Plano facility would generate $70,000,000 in property taxes alone. Economic development projects like the Plano Toyota project are impacted much more by state and local government’s overall tax policy.

Taxes are unavoidable. They fund the operation of government to provide the services most people want but they also raise the cost of doing business for companies. Businesses, just like residents, benefit from the public safety forces, infrastructure and education spending that creates a safe and productive location for a company to do business. However, the taxes charged by the local, state and federal government can create a competitive disadvantage for the United States when it comes to locating jobs.

It is no secret that the United States has the highest corporate tax rate in the industrialized world. The federal government charges the 31,000,000 small businesses, which make up nearly 90 percent of all companies, a 39.6 percent tax rate. In a 2008 Cato Journal article titled, “State Income Taxes and Economic Growth,” Barry Poulson and Jules Gordon Kaplan found it is not a secret that higher marginal tax rates impact economic growth. However, the federal tax code is filled with special exceptions for business, industries and even taxpayers. In fact, the federal government spends what equates to nearly 8 percent of the national gross domestic product on “tax expenditures” that reduce individuals and companies tax burden according to a 2012 study by The Hamilton Project’s Dmitri Koustas, Karen Li, Adam Looney and Leslie B. Samuels. These tax expenditures include the home mortgage deduction, research and development and other business oriented tax credits. Federal tax policy is based upon a high marginal rate complimented by massive tax credits geared toward specific industries and activities. The federal tax reform Washington keeps promising to have will be geared toward reducing the corporate tax rate but doing away with a number of special tax credits and deductions. While that would make tremendous economic sense, attacking the substantial and popular home mortgage and other tax deductions will be a tough climb.

State and local governments are not sitting idly by and waiting for Washington to solve their problems. State and local governments instead are using tax policy to impact the economic success of a region. States and regions will use what they tax as well as where they tax to impact economic development. Pro-business advocates point to the handful of states that do not charge a state income tax as being attractive to business. Seven states including, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, operate without a state income tax. Only a handful of states allow their cities to charge an income tax. Arthur Laffer, the father of the famous Laffer Curve, advocates that states without an income tax experience higher state domestic product growth as compared to states with a state income tax. Income taxes do punish economic success. They are a hundred year old creature of the Progressive Era born to address massive wage gaps between the rich and poor during the Gilded Age. The income tax has failed to equalize economic classes but it has proven a steady and reliable source for the $2,000,000,000,000 in state and local government spending.

A more powerful yet abused tax policy used to recruit companies is not taxing activity on certain pieces of land. The Enterprise Zone program was crafted to promote investment in struggling urban centers by removing or reducing taxes on businesses that located in these neighborhoods. The federal Empowerment Zone Program produces positive economic development results by offering a concentration of federal tax abatement and credits to a small number of communities in very specific neighborhoods. In a 2008 Cowles Foundation report titled, “Do Local Economic Development Programs Work? Evidence from the Federal Empowerment Zone Program,” Matias Busso and Patrick Kline found this concentrated federal program provided positive results by spurring economic activity in struggling neighborhoods.

All 50 states operate Enterprise Zone programs usually implemented by local governments who decide when and where taxes will be abated. Not all is perfect with Enterprise Zone programs. Some challenge state enterprise zone programs that provide location-based tax abatement because they reward economic behavior that will otherwise happen. Others challenge state Enterprise Zone programs as really a product of good lobbying and not based upon the concern of struggling neighborhoods. Probably the most legitimate challenge to Enterprise Zone programs is that many states and local governments let all local governments have access to this program; thus, it is not limited to merely struggling urban and rural communities. In fact, it has become a tool to spur suburban growth and sprawl.

The Plano Toyota project offers an interesting lesson for public administrators striving for economic debate while acting as good stewards of public tax dollars. Toyota, like most companies, was no doubt attracted to a state without an income tax. Texas is a magnet for economic growth because they more often tax consumption than wealth creation. The Plano Toyota project also illustrates how the notion of the Enterprise Zone project strayed. Plano is not poor. This upscale Dallas suburb like suburban counterparts throughout the U.S. uses the state’s Enterprise Zone program to attract companies. Public administrators need to be vigilant to promote a tax policy that rewards the creation of high-wage jobs in targeted regions of their state. The federal government should fulfill their promise for tax reform that just does not lower the corporate tax rate but rewards the creation of high-wage jobs as well. Tax policy has a major impact on America’s economic future and the nation should start acting like it to retain and attract high-wage jobs in regions that need the public subsidy.

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