No Good Reason for GOP Tax Subsidies

Republicans were elected overwhelmingly nationally.  There was a backlash against incumbents, special interests, and Obama successfully (in some cases) pursuing his leftward agenda.

Candidates for state legislative offices benefited from the wave, too.  In Arizona, there are now only nine Democrats in the Senate.  Both Houses have super-majorities.   Balancing the budget and fixing the economy are common themes for the newly minted GOP lawmakers.

But when it comes to fixing the economy, the early reports indicate the Republicans might be a little tone deaf to the sentiment of the people who just elected them.

On tax policy, for example, there appears to be some life left in the notion that state policymakers can manipulate the tax code to improve the economy by providing carve outs and incentives for certain businesses.  The election should have driven a final nail in that coffin.

The expansion of enterprise zones, where companies who meet certain criteria would receive preferential tax treatment, is bad tax policy.   The House plan last year included something similar and GPEC has been the lead driver of this policy.  This provision won’t stimulate the economy and we hope it similarly fails to stimulate interest from new lawmakers.

There is simply no sound reason for this policy.  Creating a new benefit that only some companies benefit from distorts the tax code for everyone else.  Yes, some jobs pay more than others, some industries export more than others, some companies are high-tech, while others are not.  But the state should not tip the scales in favor of some activities over others.  It is not the job of state leaders to distort the tax code under the pretext that they know what they’re doing.  They don’t.  My favorite quote on this topic:

“The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence.”

Alan Peters and Peter Fisher, “The Failures of Economic Development Incentives,” Journal of the American Planning Association 70, no. 1 (2004)

These are the policy reasons to oppose carve outs.  There are political ones, too.  Which constituency do carve outs appeal to?  Aside from the beneficiaries of the carve outs, nobody supports these things.  Do Republicans really believe they were given super-majorities in both the House and the Senate to bestow special tax favors to certain businesses?  Are the Tea Party activists clamoring for special breaks for big business?  Of course not.

One lawmaker told me that unless it benefits the guy running the hot dog cart, he’s not voting for it.  That’s the right sentiment.

Arizona lawmakers should begin to phase out special carve outs and incentives.  The tax code should become flatter with less distortion.  To the extent rates can be reduced, they should be reduced for everyone.  If they can’t be reduced for everyone, then reductions should be placed on the backburner, or phased in over time.

In short, Republicans should begin to simplify the tax code, not make it more complex.  This would prove to be both a policy and political winner.