Get Educated

Stay up to date with email updates
Taxes

Does Government “Help” Prevent Growth?

posted on June 7, 2018
Tax credits and incentives are often utilized to disguise both high tax rates and regulations.

The Iowa legislature is already making progress in creating a more friendly economic environment for job creators by passing needed tax reform legislation. The tax reform bill signed into law by Governor Kim Reynolds begins the process of reducing Iowa’s high individual and corporate tax rates. In addition, this legislation also calls for a strenuous review of Iowa’s many business tax credits, which will total over $400 million in 2018.

It is argued that tax credits are necessary in the economic development wars because Iowa is competing with other states to lure businesses. This economic development competition has even been compared to an arms race between states as they try to outmaneuver one another to attract employers. The question must be asked if taxpayers in Iowa are getting the value from all the cost of the tax credits?

A recent study published by the Mercatus Center at George Mason University by economists Peter T. Calcagno and Frank L. Hefner contends that states with high tax rates and heavy regulatory burdens often utilize tax credits and other incentives to attempt to make up for broader fiscal policies that discourage economic growth. Calcagno and Hefner argue that “targeted development incentives may compensate in part for locational characteristics that make a state’s economic policies and climate unattractive.”

Tax credits and incentives are often utilized to disguise both high tax rates and regulations. Iowa’s high individual and corporate income tax rates are examples of economic policies that deter economic growth. Calcagno and Hefner note that “state individual income tax burdens lead to a higher probability of offering firms a megadeal.”

As expected, businesses will also use tax credits and incentives to their advantage in attempting to play competing governments off one another to get a better deal. Calcagno and Hefner claim this allows businesses to engage in rent-seeking, which “takes the form of firms employing resources to lobby for tax breaks and other subsidies that add to owners’ profits…”

In addition to rent-seeking, tax credits and incentives also lack transparency, that is, the taxpayer does not always have a clear understanding if they are having the intended impact. These credits and incentives may even trick taxpayers because they may see the result of new jobs in a community, which is a positive, but they do not see the impact on other sectors or other communities. “The jobs ‘created’ at a new plant are easily visible to the state or local community; voters will not see the jobs that are lost elsewhere in the economy due to higher tax burdens imposed on other businesses and consumers,” argue Calcagno and Hefner.

Iowa’s policymakers have a chance to further evaluate our numerous tax credits and complex tax code. Many special interest voices will be heard proclaiming that their respective tax credit is essential and must be protected, but it is time for our economy to stop being dependent on government incentives for economic growth. Iowa would be better served to build upon the recent tax reform efforts by continuing to lower both the individual and corporate tax rates.

Creating a pro-growth economic policy that lowers tax rates, reduces regulations, and limits government spending is not easy to achieve. Although these policies lead to the best formula for economic growth and opportunities, many policymakers find it easier to continue the status quo. Iowa is fighting to create economic growth, retain population, and attract new residents. United States Representative David Brat (R-VA) recently wrote that “people fed up with high tax, slow growth areas of the country migrate in large quantities to low tax, high growth areas of the country.”

The states that are realizing the greatest growth in terms of population are not the high tax and regulatory states, but rather states that are doing the opposite. States such as Florida, Texas, and even rural agricultural states such as North Dakota are gaining population because of pro-growth policies.

If Iowa wants to increase economic growth, create more jobs and opportunities, and make our state more welcoming to businesses and entrepreneurs, policymakers need to implement pro-growth fiscal policies. The legislature may find that some tax credits are serving the interests of the taxpayer, but when it comes to business tax credits we should learn from the late economist Henry Hazlett who wrote that “government ‘encouragement’ to business is sometimes as much to be feared as government hostility.”