Archive for the ‘tax incentives’ category

Zero Sum Tax Increase

June 3, 2015

Today I read an article in the Baltimore Sun on the subject of tax incentives.  Tax policy, especially how much citizens pay, is a controversial issue these days.  “Taxes are too high, I pay too much.”  So, it’s important to hear what your State or local government is proposing just in case they are quietly taking money from your pocket.

Here’s an example of finding out there is no free lunch.  It seems HBO’s show “VEEP” has qualified for California tax incentives if it elected to switch its production site from Maryland.  According to the article, the prize is $6 million dollars in business income taxes less “VEEP” would pay in California. Maryland has yet to respond to the challenge and the shows future shooting location remains in question.

So what?

In the past, newspapers have reported bidding wars between various cities and states over where automobile factories would be built. Cities have bid against each other for conventions or attracting new employers. Some cities, like Philadelphia, offer developers tax breaks (abatements) to encourage the building of new condos and apartments. Each taxing authority thinks they can garner the advantage and be immune to anyone trying to poach the new business from them. Hmmm.

The taxing authority’s incentives seem to be, in exchange for lower taxes, the new business (or convention etc) will bring new jobs and spending to the community, and these new jobs and spending will be produce other tax revenue in the long haul. In a world where everyone slept, this would be a fool proof strategy. Hmmm.

What often happens, however, is the original host community finds out about the lower tax offer and matches the incentive.  Consequently the business remains put, and the host community simply receives less tax revenue. Nice.

In a tax war between similar size States, the contest seems fair even if mutually destructive. Between huge States like California and much small States like Maryland, this tax fight seems unfair.

California might argue that the filming industry was originally based largely in California.  States like Maryland used incentives to first lure movies and TV programs away from California. Hmmm.

The free lunch theorem, however, predicts tax driven competitive action has only one real victim and that is the existing tax payer.

With a show like VEEP, there is just so much production costs regardless of whether the show is filmed in Maryland or California. The zero sum says that if Maryland host the show, California get zero, and vice versa.  If either State offers tax incentives and attracts the show’s production, it receives less business tax revenue than might be possible (it must forego the incentive value) and the other State receives no tax revenues. If the first State fails to attract because the original State matched the offer, then the first State gets no new tax revenue and the second State (host) gets less. Hmmm.

Competition between States on non-tax issues is healthy. Roads, schools, and work force quality are all characteristics which promote stronger State economies. Good roads, great schools, and a qualified work force require prior State investment and are useful for a wide range of applications.  In essence these States have used tax revenue to produce competitive advantages.

Using the tax code as a tool to “steal” business from some other State seems unfair because (1) richer States can spend more, and (2) unwise because in the end the average tax payers in one State or the other gets pays more.