Some Facts About Tax Credit Programs in Other States

The St. Louis Post-Dispatch reports that the Missouri Legislature is attempting to create tax credits that could be awarded up front  – that is, before the promised economic activity occurs.  David Kerr, director of the Missouri Department of Economic Development (DED), the state agency that stands to benefit from this proposal, calls the expanded power “a vital tool that we don’t have today.”

But the idea of awarding tax credits up front should give everyone else pause. We know that tax credits have a dismal track record at delivering on results promised (state audit reports and independent analysis have shown this). So why expand the DED’s power to award tax credits?

The argument is that if Missouri doesn’t award tax credits, other states will, and as a result will encourage companies to leave Missouri and take their jobs and economic impact to other states. Though the argument sounds plausible, we have to consider the facts.

Missouri already issues hundreds of millions in tax credits each year. During fiscal year 2010, Missouri issued more than $400 million in tax credits. To what benefit? According to the state auditor, tax credit programs cost more than predicted, and the DED was frequently overstating job claims and investment estimates related to tax credit awards.

Texas doesn’t award nearly as much as Missouri does in tax credits. The Post-Dispatch reporter, Tim Logan, writes that tax credit programs are “big in Texas.” However, the fund he cites is the Texas Enterprise Fund, which has pledged $439 million in credits to companies since 2003. Though Texas uses tax credits, the program Logan cites pledged over an eight-year period as much as Missouri pledged in a single year.

In fact, according to the state’s “Tax Exemptions & Incidence Report,” Texas tax credit programs offer a relatively small amount in tax credits for job creation. For example, Texas’ “Refund for Job Creation in an Enterprise Zone” awards a maximum of $5,000 for companies that can show that they created at least 10 new jobs.  In its report on tax exemptions, Texas notes that the revenue cost of that program is “negligible.” If we look at Missouri, the state issued nearly $15 million in “Quality Jobs” tax credits during fiscal year 2010. Tax credits may be big in Texas, but they are really big in Missouri.

We might be winning the bidding war with Kansas. Legislators point to businesses that move from Kansas City, Mo., to Kansas City, Kan., when tax credits are promised. But, according to Kansas’ recent Tax Expenditure Report, the state’s tax credit expenditures for development and services are about $200 million. Missouri may be giving away about twice as much tax revenue to favored industries and companies than Kansas.

Furthermore, Missouri has a more favorable tax climate than Kansas. The Show-Me Institute collects and posts tax data for all 50 states to help people compare tax burdens among states. According to that data, about 23% of Missourians’ income goes to taxes. However, 26.5 % of Kansans’ income goes to taxes.

In short: When it comes to taxes, Missouri is already competitive, compared to Kansas. We should continue to lower our tax burden for all, in order to entice more businesses and individuals to move to this state.

If tax credits result in growth, Michigan would be an economic powerhouse. It is not. Every time I hear a legislator or reporter question whether tax credits are needed to move industry to a state, I can’t help but think of my home state. Michigan awarded more than $1 billion in tax credits last year to just a few auto companies. In fact, the governor’s report on tax exemptions estimates that more than $33 billion in tax exemptions are awarded each year in the state. And, what exactly does Michigan have to show for that much in tax credits and other awards? Not a lot.

Look, tax credits don’t guarantee growth. What they do guarantee is that many pay a tax rate that is too high so that the favored few can get a tax break.