By Christine Harbin
Special to The Globe
In a recent St. Louis Post-Dispatch op-ed (“Tax credits work for Missouri,” June 17), Donald Rosemann argues that tax credits create jobs and promote economic development, and also suggests that historic preservation tax credits in particular have been very successful. Unfortunately, he overlooks everything that Missourians lose when the state hands out billions to favored industries.
Rosemann claims that tax credit programs are “too important for St. Louis and Missouri to scale back — especially in difficult economic times.” To the contrary, difficult economic times are exactly when the state can least afford to give tax credits to select firms and businesses. Tax credit programs place an additional burden on taxpayers who are already hurting. A particular tax credit may provide some benefits, but the state has to weigh these against the costs of the program, which are much more difficult to anticipate fully.
Additionally, because many credits do not have to be redeemed in the year that they were issued, tax credits represent a future liability for the state. This negatively affects Missouri’s ability to recover from difficult economic times, because officials will have to dole out money at unexpected intervals in the future.
Targeted tax credits discourage economic development in the state by hurting businesses in non-favored industries. Legislators don’t have a special ability to predict which company or industry will maximize revenue or economic growth, so the cost of such credits for taxpayers will almost certainly exceed the benefits. By shifting the tax burden from one favored party to others, targeted tax credits force everyone else in the market to compete at a disadvantage, and an uneven playing field is not an optimal economic climate for fostering development. By reducing the tax burden of a single targeted industry or company, the marginal tax rate for everybody else necessarily increases if overall government spending is not also reduced.
A recent report from Missouri’s state auditor found that tax credits have less of an impact than predicted and cost more than anticipated. The report reviewed 15 major tax credit programs in Missouri, and found that the total cost of the programs had been underestimated by $1.1 billion over a five-year period. Furthermore, many of these tax credit projects include property tax abatements, so those developments won’t bring additional tax revenue for state and local governments to fund schools and other essential services.
Proponents of tax credits fail to consider the many other types of economic activity that could have come into existence had the taxpayers of Missouri been allowed to keep and invest their billions. A factory and a renovated historical building are easily seen effects of tax credits; however, the unseen negative effects include those products and services that were never purchased or consumed in the private sector, because public officials spent the money that would have paid for them.
When the state carves out sections of its tax base in order to reduce the burdens for a select few, everybody else has to pick up the difference. Broad tax cuts are preferable to tax credits because they bring growth to the entire economy, rather than only to those lucky or connected enough to be singled out for special treatment. A lower-tax environment for everybody would attract new businesses and individuals to Missouri more efficiently and effectively. Missouri’s tax credit programs have not fulfilled their stated purposes, and spending more on them will not likely result in better outcomes.
Christine Harbin is a research analyst for Show-Me Institute.