Tax credits considered harmful

As we teeter on the brink of the Fiscal Cliff, we’re once again hearing calls to simplify our tax code.  If all the loopholes were closed, say proponents, we wouldn’t have high-rollers getting away with disproportionately light tax contributions.  I’m not sure that simplification will solve all our fiscal problems, but I do believe that complicated tax codes benefit the well-off more than the working class.

Moreover, this isn’t just true for individuals — it’s at least as much a problem with corporations.  At a Federal level, large corporations have a growing influence over our elected officials.  Energized by the “Citizens United” verdict of 2010, our most recent elections were the costliest in history, with a lot of that new money being injected via super-PACs that can veil the identity of contributors.  Due to the secrecy afforded those contributors, it’s impossible to say how much of that new money, exactly, comes from corporations, but it’s a lot.  Corporations can’t tell candidates how they expect them to vote, of course — that would be corrupt!  If a candidate happens to infer some intent, though, and take that into consideration when legislating tax code, for instance — why, that’s just a case of a representative doing what he can do to help his constituents.  Corporations, after all, are people, too.

Companies who aren’t large enough to make a splash at the Federal level, though, can still throw their weight around locally.  Frequently, these days, we see this take the form of local tax credits.  Typically, these take the form of an exemption to some or all local tax burdens that are granted to companies who meet some criteria.  The most common systemic criteria, of course, is relocation into a tax district, and tax credits for this are common enough that you’ll see them listed on web sites for cities around the country.  Individual companies are free to negotiate deals like this on an ad-hoc basis, too, in return for either relocating or not (“give me a credit, or I’m outta here”).

Such is the case for USA Vinyl, a Hilliard, OH company that just announced it’s moving to Groveport, OH.  Just in case you’re not familiar with the geography around Columbus, OH, by the way, here’s the move we’re talking about:

Now, in practical terms, what are the impacts of this move?

  • A whole bunch of Hilliard employees are going to have to drive down to Groveport every day, or find new work.
  • Any employees that do choose to commute are going to have to drive along a stretch of Hwy 270 that’s currently under construction and horribly, horribly buggered-up right now, so you can count on them spending hours a day sitting in stop-and-go traffic burning gas in their SUV’s.  I’m not going to go as far as to suggest that the extra traffic will be noticed on top of the mess that already exists, but it can’t help, either.
  • USA Vinyl will expend a bunch of time and energy coordinating a move of 22.2 miles, rather than making vinyl products, but it’s worth it because they’re going to save a bundle on taxes over the next five years or so.
  • There will probably be a moving company or two that enjoy a great quarter.
  • Hilliard will miss out on some local tax revenue.
  • Groveport will also miss out on some local tax revenue.

Huh?

In both cases (Hilliard and Groveport), that missing revenue will have to be made up somewhere.  Services will be cut, or other businesses and/or citizens will be asked to make up the difference.  These communities, then, are rewarding the companies who are willing to uproot themselves and leave a community for a new tax break, and shifting the burden to the citizens left behind.  And it’s happening everywhere.

Perhaps the worst news of all is that once this sort of thing begins, States and municipalities can find themselves locked in a sort of death spiral.  It’s tough to see an employer lured out of your backyard and not want to turn around and do the same thing to someone else.  It’s worth exploring the possibility of ceasing all of these incentives, either by convention or legislation, but of course this would only work until someone somewhere decides to step over the line again, and of course ultimately, there’s always off-shoring that stands to trump all the deals happening here in America.

Ultimately, I believe this is one of those cases where we’d like to be able to look to our elected officials to bring a strong, long-sighted perspective to bear on the problem, and to understand that a strong, balanced local economy is a powerful deterrent to companies who might be tempted to sneak out under cover of darkness.

That’s why we elected them, right?

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