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What's wrong with a little corporate welfare?

May 20, 2009

There's no such thing as bad free beer. Is there such a thing as a bad tax cut?

Surprisingly, yes. Not to the person who gets it, certainly, but to the person who doesn't.

If you had two widget makers in town and the city decided that ABC Widgets was tax-exempt, that would sure be a bad tax cut from XYZ Widgets point of view. The break would do for ABC all the good things tax cuts do, but it would stick it to competing XYZ and its employees.

This might seem like an extreme example, but it happens every time the Department of Economic Development allocates special tax credits to a company for building a new facility and "adding jobs." That break by definition hobbles competing companies and their workers; worse, the competitors have the privilege of paying extra taxes on behalf of the favored taxpayer.

A tax break doesn't have to be bad policy just because it goes to a business with direct in-state competitors. It's just as destructive if you tax one industry to subsidize another one. Iowa does that in a big way, taxing the rest of us to subsidize wind farms, ethanol plants, and, especially, movie makers.

There are always seductive arguments for any special tax break. Who doesn't want to have some big stars hanging out at the local A&W? Why not just throw some tax credits at them?

- It's a process that rewards industries with political clout, rather than potential profitability.

- It gives legislators and bureaucrats the power to allocate investment capital. Nobody who works with the legislators can possibly think that's a good idea.

- It drains funds from non-favored businesses, weakening them in favor of the ones with good lobbyists.

- The breaks often motivate taxpayers to find ways to get breaks from things they already do, rather than to do new things.

- Every tax break makes it that much harder to fix the broken tax system. Once somebody gets a tax break, they hate to give it up, even if doing so would make for a better tax world.

Backers of the tax breaks also ignore the opportunity costs involved. The tax credit transferred to filmmakers doesn't just come out of thin air. It comes out of taxes paid by somebody else who needs that money just as much as some carpetbagging production company from L.A.

Link: Film Tax Credits: Lower Taxes for Celebrities, Higher Taxes for You