Mega Tax breaks created Current State Budget Problems

Because so many manufacturing plants and accompanying good jobs compare new locations with old when companies decided to recapitalize or expand, states feel compelled to become rivals to attract capital investments to their states.  This intense rivalry to attract the few major employers left standing in the US economy leads many governors into basically giving away more benefits than the incoming or staying-put businesses became worth to the state and municipalities in the  majority of cases.  Many of the businesses would have stayed put even were they not given the tax breaks.

There is also a huge stake for these governors in upping their credibility for being able to attract business to the state.  It serves many of them well at the ballot box, even when the public is not really aware of what’s been given away to attract a few jobs.  Many of the worst offenders are Republican governors where flexing tax hating muscle is more importance than effective governance when heading to the Iowa/New Hampshire test grounds for higher office. The evidence is much clearer in states ruled by Republican governors.  A recent study Zach Schiller, research director at Policy Matters Ohio, a liberal government-research group in Cleveland as reported by McClatchey shows how states like Ohio, Louisiana, Texas, Michigan and many others have basically bankrupted the state with business tax giveaways and aggressive tax cuts to the richest of the rich. This has also played out on the federal level. The severe flaws with these tax cuts have become evident as the economy sank during the global financial crisis and federal funds provided during the Obama stimulus have dried up.

Across the country, taxpayers jarred by cuts to government jobs and services are reassessing the risks and costs of a variety of tax reductions, exemptions and credits, and the ideology that drives them. States cut taxes in hopes of spurring economic growth, but in state after state, it hasn’t worked.

There’s no question that mammoth state budget problems resulted largely from falling tax revenues, rising costs and greater demand for state services during the recession. But questionable tax reductions at the state and local level made the budget gaps larger — and resulting spending cuts deeper — than they otherwise would have been in many states.

A 2008 study by Arizona State University found that that state’s structural deficits could be traced to 15 years of tax cuts, mainly income-tax reductions that “were not matched by spending cuts of a commensurate size.”

In Texas, which faces a $27 billion budget deficit over the next two years, about one-third of the shortage stems from a 2006 property tax reduction that was linked to an underperforming business tax.

In Louisiana, lawmakers essentially passed the largest tax cut in state history by rolling back an income-tax hike for high earners in 2007 and again in 2008.

Without those tax reductions, Louisiana wouldn’t have had a budget deficit in fiscal year 2010, the 2011 deficit would’ve been 50 percent less and the 2012 deficit of $1.6 billion would be reduced by about one-third, said Edward Ashworth, the director of the Louisiana Budget Project, a watchdog group.

The original source of all this tax cutting madness can probably be traced to California and the infamous Proposition 13.  Prior to Prop 13, California was a state in an enviable position with wonderful, low cost schools and infrastructure that was the symbol of US modernity. The Reagan roll backs of taxes and passage of increased write offs for investment to stimulate capital investments provided similar short term boosts that have led to long term problems.

Before California’s Proposition 13 triggered a nationwide tax-cut revolt in the late 1970s, state and local taxes accounted for nearly 13 percent of personal income in 1972, Bartik said. By 2007, it was 11 percent.

State corporate income taxes have fallen as well. Once nearly 10 percent of all state tax revenue in the late ’70s, they accounted for only 5.4 percent in 2010.

“It’s a dying tax, killed off by thousands of credits, deductions, abatements and incentive packages,” according to 2010 congressional testimony by Joseph Henchman, the director of state projects at the Tax Foundation, a conservative tax-research center.

Even now, as states struggle to provide basic services and ponder job cuts that threaten their economic recovery, at least seven governors in states with budget deficits have called for or enacted large tax reductions, mainly for businesses.

Even now, both the President and members of both parties are talking corporate tax cuts when many households pay more in taxes to the IRS than the biggest of the multinationals. Here’s a  article in Forbes from last year showing how GE and other major corporations that live off of federal contracts also manage to avoid federal tax obligations.  Exxon-Mobile and Walmart are also tax avoiders.  You can go read the details but I sought out this old article for this tidbit so you  know why a lot of them can get away with paying so few taxes.

But it’s the tax benefit of overseas operations that is the biggest reason why multinationals end up with lower tax rates than the rest of us. It only makes sense that multinationals “put costs in high-tax countries and profits in low-tax countries,” says Scott Hodge, president of the Tax Foundation. Those low-tax countries are almost anywhere but the U.S. “When you add in state taxes, the U.S. has the highest tax burden among industrialized countries,” says Hodge. In contrast, China’s rate is just 25%; Ireland’s is 12.5%.

Corporations are getting smarter, not just about doing more business in low-tax countries, but in moving their more valuable assets there as well. That means setting up overseas subsidiaries, then transferring to them ownership of long-lived, often intangible but highly profitable assets, like patents and software.

The President is correct in that if we lowered the overall tax rate on corporations, these companies would be less likely to relocate overseas to a certain extent.  This would have to be coupled with closing the loopholes that allow them to avoid many taxes.  Right now, the loopholes make the effective corporate tax rate different from the published. This would be a gargantuan task as each congressman and senator has a business they protect with all their might.  Even Democrats in Louisiana protect the oil and gas industry, as an example.

The odd thing about the problems with the state and all these tax giveaways to businesses is that their tax rates are a minor decision variable so giving them tax breaks doesn’t provide business much benefit but hurts the state.  When I worked as a consultant to the Department of Economic Development in Nebraska back in the 80s, I found that what a lot of corporations actually looked for in business site were good schools, good recreational facilities, and just basically a great place to live.  Omaha frequently lost out to  many bids because it was considered a pretty boring place to live with few recreational opportunities.  The weather was frequently one reason no one wanted to move there.  It had no major sports teams for one.  So, why are these governors gutting school budgets and public works programs when the same things that benefit the people in the state attract businesses to the area?  I will never understand that one.

Many of the new tea party governors are cutting taxes like never before assuming that just giving away tax breaks will appease any potential business leaders and possible attract some new ones.  This faith-based tax policy is based more on ideology than any actual data that shows tax breaks do any of that.

Business tax reductions may be overrated as an economic stimulus because they’re so low on the totem pole of expenses. For most businesses, the cost of labor is probably 15 times the cost of all state and local taxes, said Bartik of the Upjohn Institute.

In his own research, Bartik found that a 10 percent across-the-board cut in state and local business taxes might boost employment by 2 percent, but it could take up to 20 years.

“Most studies indicate you might get 30 percent of the effect after five years and maybe 60 percent after 10 years,” Bartik said. “It takes a while because investment decisions are quite lagged and take place gradually.”

Compounding Ohio’s budget woes are 128 state tax exemptions, credits and deductions that drain more than $7 billion a year in would-be revenue. These loopholes make Ohio miss out on one of every four dollars it would otherwise collect in taxes, said Schiller of Policy Matters Ohio.

In Missouri, business and individual tax credits cost the state $521.5 million in fiscal year 2010, compared with $103 million in 1998, according to a state report.

Louisiana’s 441 individual and corporate tax breaks cost the state $7.1 billion last year. That nearly matches the $7.7 billion that all state and local taxes brought in.

Some of the breaks provide sales-tax exemptions on groceries, prescription drugs and residential utilities that saved Louisiana taxpayers $717 million last year. But another allows Louisiana companies to keep 1 percent of the state sales taxes they collect — about $34 million statewide — just for filing their tax returns on time.

I’ve seen Louisiana go down hill pretty rapidly over the last few years.  Roads are in disrepair.  The students at the UNO business school actually clean their own classrooms and the building twice a week because the two janitors assigned to the huge 4 story building just can’t keep up with the duty.  The unemployment system is a mess with waits of months to get a claim processed and a forced move to the phone and the computer or a 3 hour wait on the phone to actually talk to a person.  I wouldn’t recommend any one locate here because just simply getting to a state employee these days is impossible.  They’ve adopted the phone tree hell realm model of business.  It’s worse than getting customer service from a large bank.

Still, conservative tax cut fanatics still spin their tales of being overtaxed and how the burden is driving business out of the country.  Really, it’s not the taxes.  Businesses are going overseas because that’s where the money is now.  The ASEAN region is seeing a huge increase in middle class consumers.  Not so where in the US where wages are stagnant at best.  Historical data is showing that these state tax cuts are not only not bringing businesses to the states, but they are driving people away.  As I found in my work, companies cannot attract and maintain good employees in states with bad schools, bad roads, horrible crime rates, and lack of basic services and recreation.  That’s not what you hear from conservative “experts’ who ignore data to follow their tax cutting muse.

Hodge, a conservative, said that closing loopholes and exemptions was less harmful to the economy than tax increases were. The Tax Foundation supports scaling back or closing tax loopholes, while lowering tax rates across the board.

“My argument to state lawmakers is that lower rates for everybody are better than tax incentives for some,” Hodge said.

That incentive-free philosophy was behind Michigan Gov. Rick Snyder’s call for a flat 6 percent corporate income tax to replace the current business tax system. But Snyder’s flat tax amounts to a $1.5 billion tax cut for businesses, paid for in part by education cuts, personal income tax increases and taxing public and private pensions.

“We think that’s the way to rebuild our state, and to get it on a path toward economic prosperity,” Snyder’s top economic development official, Michael Finney, said during a recent trip to Washington.

History suggests otherwise, however. After the nation recovered from the 1990-91 recession, 43 states made sizable tax cuts from 1994 to 2001 as the economy surged. Twenty-eight states, in fact, reduced their unemployment insurance payroll taxes after 1995.

But states that cut taxes the most ended up with the largest budget shortfalls and higher job losses when the economy slowed again in 2001, according to research by the Center on Budget and Policy Priorities.

These are some truly startling conclusions that show just how far we’ve come from using data, economics, and basic accounting to make decisions at even the state level.  When governors are ruling multiple important states based on political ideology and faith based economy policies, the country is in real trouble.  Some of these folks–like Scott Walker–seem to be true-believers.  Bobby Jindal is more of an opportunist than a true believer.  His presidential ambitions have led him to make decisions he knows will hurt the state. He’s done nothing but pursue an agenda  that will serve his ambitions.  I imagine that Rick Perry probably falls into that category too.

It is absolutely necessary that people know that there are direct effects of bad tax policy.  It is not only evident in schools, roads, and basic goods in services, it is also evident in the types of people that start leaving your state.  Most of the states with these problems are also having population shifts that make them look more like developing nations that countries with mature economies.  The more they have tried to set up the rules in favor of businesses doing what they want, the more they lose the types of workers and residents that appreciate and demand good government services.  I’ve said this many times, but I had no problem paying my high tax bill in Minnesota because I could see the money put to good use daily in my world class roads, schools, and recreational facilities.  I begrudge giving Bobby Jindal a dime because I figure it will only go to enrich people that don’t need anything from me to begin with.

This is a situation that more people need to learn about and discuss.  Please take the time to review some of the startling statistics in the McClatchy article.  Each state usually has a non-profit group, like Policy Matters Ohio or Louisiana Budget Project, that closely follows these actions.  I’d recommend you find the group for your state and become informed.  I know most of you aren’t my neighbors, but the LBP has a great report up on how Jindal has basically turned my state into a business subsidy haven that has shown to be the most inefficient in the country.  Here you can see directly how these tax give-aways are not producing good results.

According to the most recent report from the Louisiana Board of Commerce and Industry, Industrial Tax Exemptions awarded in 2010 are estimated to cost Louisiana over $946 million over the next ten years. In 2009, Louisiana awarded exemptions worth $745 million and in 2008, over $614 million. That means that over a three-year time span, more than $2.3 billion in potential revenue has been lost in return for the creation of 7,256 potential new jobs.

The most recent report, dated August 2010, identified 592 companies and corporations across the state that qualified for the exemption. These companies employ over 206,128 jobs and created 2,537 new jobs. Louisiana consistently awards these ten-year property tax breaks for dozens of multi-national industrial giants that have little need for state subsidies.

You might at least be interested to see the companies on the list.  Most of them are from the oil industry which is of course in a period of incredible profitability and can’t relocate to Orlando or Atlanta even if they wanted to.  They are here for our oil.   Anyway, I hope this information stimulates a good discussion.