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WHERE "TARGETED" TAX BREAKS GET AIMED

September 26, 2005

David Brunori tells a little tale of "targeted" tax breaks at State Tax Notes today (unfortunatly it is behind the subscriber firewall). It is set in Massachussetts, but its lessons apply anywhere politicians invoke the magic words "economic development."

It seems that Massachussetts passed a series of income and property tax breaks to "help blighted neighborhoods." Mr. Brunori tells how widespread blight turned out to be:

One recipient of the tax credit, Affiliated Managers Group Inc., received $1 million in corporate income credits -- plus additional property tax breaks -- for developing its headquarters in Beverly, Mass. Let's forget for a moment that Beverly is one of Massachusetts's wealthiest areas. Beverly has a median family income of $67,000 a year, compared to $40,000 for the United States.

And the blight spread:

Manulife, a Canadian insurance company with a market cap of $44 billion and $26 billion in revenue, received a tax credit for property in South Boston's seaport district. That area of Boston is the opposite of blighted.

How did "blight" relief get funnelled to areas where no blight had been apparent? It's not entirely clear, Mr. Brunori points out some suggestive connections:

... Republican Lt. Gov. Kerry Murphy Healey's husband, Sean, is the CEO of Affiliated Managers Group, a beneficiary of the credits. Affiliated received the credits before Healey became Romney's second in command (and before Romney became governor). But Affiliated is a rich company ($3 billion in capital worth, $800 million in revenue). Sean is a pretty rich guy himself (he earned $3.3 million last year and just sold $13 million in stock options). And everyone knows Kerry Healey would like to run for governor next year. Oh -- the chair of the Massachusetts Republican Party, Darrell Crate, is also the chief financial officer of Affiliated.

Targeted tax breaks tend to flow to the well-connected, of whatever party. The rest of us get to subsidize them. If you want to promote the economic development of the well-connected party (a bi-partisan group), then targeted tax breaks are just the thing. If you want to benefit the whole state, you eliminate the credits and lower rates for everyone.

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