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VA: Analysts say business tax breaks hurt revenue growth and play favorites

By   /   August 28, 2012  /   No Comments

By Carten Cordell | Watchdog.org Virginia Bureau

Since January, the governor’s office has announced that at least 20 state grants were awarded to entice companies to expand or institute new operations in Virginia.

ALEXANDRIA — Virginia is perennially considered one of the most business-friendly states in the nation, in part because of a host of tax incentives geared toward attracting companies and jobs.

But how much do tax breaks fuel job creation, and at what price to the state budget?

“The taxation system is a blunt tool in terms of being used in economic development purposes,” said Maurice McTigue, vice president of the Mercatus Center of George Mason University in Fairfax. “The best economic development program is not to have an economic development program.

“You get that because you have created a climate that is business-friendly to all businesses. If you need to give special tax concessions to a business to come to your community, then you are probably ignoring some other things that you need to address.”

Since January, the governor’s office has announced at least 20 state grants were awarded to entice companies to expand or to institute new operations in Virginia. That figure doesn’t include legislation signed this year to award more grants to help businesses.

Critics say such grants don’t often create  jobs, but rather set up a competitive battle between states to snag existing jobs through sweetened tax breaks.

“There’s two parts to this coin,” said Howard Gleckman, resident fellow at the Tax Policy Center — a tax policy partnership between Washington, D.C.-based think tanks the Urban Institute and Brookings Institution. “One of them is providing the tax subsidies to these employers. What that does mostly is move jobs around. It doesn’t create many new jobs.

“The second issue is after you have provided all of these subsidies, do you have sufficient tax revenue to provide the kinds of services, including education and transportation, that also very important to potential employers?”

The issue of grants and tax preferences came to the forefront last year, when a report released by the Joint Legislative Audit and Review Commission found that “tax preferences collectively reduced liability by approximately $12.5 billion in 2008, which represents nearly 90 percent of the state revenue collected from the tax systems reviewed ($14.3 billion).”

The report spurred reform during the general session, with legislation from Delegate Ben Cline, R-Bath, to impose expiration, or “sunset,” measures on new tax grants after five years, if they are not renewed.

Delegate Steve Landes, R-Ablemarle, also sponsored a bill to establish a subcommittee to evaluate future tax preferences, beginning next general session.

But existing tax grants still stand in their current form, and Scott Drenkard of the Tax Foundation, a nonpartisan tax research group based in Washington, D.C., said the practice could actually hurt business development by playing favorites with the companies that win the grants.

“There are two ways to be competitive,” he said. “You can be competitive by being like Walmart, which is the one low price available for everybody all the time, or you can be competitive by being like JoS. A. Bank, where prices are artificially high, but there are sales every week.

“To me, the better option, because you don’t know which businesses you are going to attract because the future is uncertain, is to offer the same playing field to everybody.”

Despite the state’s incentive programs, the Tax Foundation ranked Virginia a middling 26th place for friendliest business tax climate in the nation. Drenkard suggested that the Old Dominion’s individual income tax could be streamlined to improve business climate by providing an equal playing field to raise revenue.

“To me, the easiest fundamental change that would improve that score would be lowering the rate and broadening the base,” he said, “meaning moving toward a flatter income tax structure and lowering the rate overall. Then you wouldn’t have the preferential treatment of certain incomes over others.”

Carten Cordell can be reached at carten@olddominionwatchdog.org

 

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