June 8, 2009

Taxation

Gauging Effectiveness of Tax Policy

Marc Comtois

In any kind of system--computers, manufacturing, planned maintenance, what have you--the importance of a "feedback loop" is recognized. Basically, you have a process or method in place and you want input as to how well it is working. "Good" feedback often necessitates a change in operating process or, possibly, system design. In yesterday's ProJo, John Kostrzewa essentially asks that our corporate tax policy--specifically targeted tax credits for certain businesses--be put in a feedback loop. The question: are we getting the benefits we hoped for (more jobs) when we let companies pay the state less in corporate taxes?

This is the way economic development gets done across the country. A corporation has jobs. The government has giveaways or tax breaks. They woo each other, get married and everybody lives happily ever after.

Except nobody checks back to see if the incentives really accomplished what they set out to achieve.

But now, Rhode Island has started to take a peek.

As Kostrzewa explains, current head of the Department of Revenue Gary Sasse advocated for just such a review process when he was running the Rhode Island Public Expenditure Council (RIPEC):
When he ran the Rhode Island Public Expenditure Council, he advocated tax breaks that are accountable, transparent and targeted toward specific types of jobs. As head of the state Department of Revenue, he pushed forward the collection of data. He also headed the tax reform panel created by Governor Carcieri that advocated a study of job-creation tax credit and questioned why they shouldn’t be reserved for higher-paying jobs with benefits.

But now, in his additional role as head of the Department of Administration, he seems less aggressive.

Sasse says that such a study would be "complex." Well, that's too bad, such a study should be done to see if it's actually working. And if targeted tax cuts don't work, maybe the solution lay in broad based tax incentives, huh?

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"And if targeted tax cuts don't work, maybe the solution lay in broad based tax incentives, huh?"

Horrors.

Posted by: Monique at June 8, 2009 1:42 PM

Let me give you an example of why broad based tax changes, rather than company specific incentives, make infinitely more sense.

Say I moved my business and 100 jobs to RI in 2007 and received a special tax deal tied to the creation of 20 new jobs that I planned to add over the next two years.

Then all hell breaks loose in 2008, and I'm forced to lay off 40 of the original 100 employees to keep my business out of Chapter 11.

What's the right answer? For me to create the jobs and tank the company? For the state to demand its tax credit back and tank the company?

This is a perfect example of why tax credits tied to job creation simply don't work -- broad based policies that create a healthy climate in which businesses and jobs can grow are fare superior to targeted credits.

However, RI has a snowball's chance in hell of enacting such policies (e.g., fixing the public schools, reducing overall taxes, improving infrastructure, cutting corruption and the anti-business attitude that prevails in too many offices on Smith Hill, etc.), while other states continue to offer deals targeted to specific companies.

Basically, it is a no win -- for RI taxpayers, at least -- situation.

Sadly, I expect the public sector unions and poverty crews to use this as an excuse for raising taxes on corporations and the rich, in order to keep the gravy train limping along for another year.

I will shed no tears when the whole system collapses under its own economic weight, short-sightedness and corruption.


Posted by: John at June 8, 2009 6:52 PM
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