Tax incentives–Why not hold them to the same standard as other spending?

I recently attended a meeting of the state’s Incentive Review Committee. This board of citizens is appointed by elected leaders to review some of the hundreds of tax incentives we give to encourage specific economic activities. Dr. Larkin Warner, a member who also is a retired professor of Economics at Oklahoma State University, called the committee’s attention to two research approaches and current views on state tax incentives for businesses.

In the July 13 & 20 edition of Business Week, Jessica Silver-Greenburg asks Will Tax Breaks Boost State Jobs? She points out that incentives are a zero-sum game. Michigan might be better off for keeping a GM plant by spending $44 million in tax money, but the country is not.While state economic development officials defend the programs as essential to the state’s economic future,  Greg LeRoy of Good Jobs First, contends:

It’s a net-loss game for state and local governments. The only winners are the companies playing the tax game.

Warner also noted the ongoing analysis of state tax incentives by the Federal Reserve Bank of Minneapolis. In this 2007 testimony before Congress, bank senior vice-president Arthur J. Rolnick argued that incentives lead to wasteful competition between state and local governments that struggle to protect the public, educate children, and replace crumbling infrastructure. He called on Congress to  put an end to state subsidies.

It is now time for Congress to exercise its Commerce Clause power to end another economic war among the states. It is a war in which states are actively competing with one another for businesses by offering subsidies and preferential taxes.

We don’t expect Congress to end the incentive competition any time soon. So we hope Oklahomans will turn toward a thoughtful discussion of incentives. We should ask the same questions we ask about  all government programs:

• Is this tax incentive the best possible use of our public money?
• What will happen if we don’t offer the incentive?
• Who benefits from the incentive?
• Are there cheaper ways of achieving the same result?
• Is this an appropriate arena for government action?

The Incentive Review Committee has an important role to play in this discussion, but we need more involvement and a broader, more comprehensive approach. The state can help get the ball rolling by improving the transparency and accountability process for incentives. Earlier, we noted the recent addition of tax credits to the state’s Open Books web site, as well as the limitations. Now, we can learn in detail whose taxes are cut through the use of tax incentives. We hope to move toward a more comprehensive approach that tells us how much the credits cost altogether and what the state gains, if anything, through offering tax incentives. Then we can address those questions about whether we are using our public resources effectively.