Tax Credits: A Poor Strategy for Economic Development in Missouri

Not surprisingly, every person who has testified before the Missouri Tax Credit Commission during its regional meetings has spoken in favor of tax credit programs — primarily because those people, who work in industries subsidized by state tax credits, directly benefit from the programs.

Tax credit programs defeat the purposes that supporters usually cite in their favor: encouraging employment and helping Missouri compete. In short, tax credits are a form of wealth redistribution — we all bear the cost, but only special interests and favored industries benefit.

Tax credit programs are not as effective as advertised. The state auditor recently found that fiscal notes underestimated the total cost of the programs by $1.1 billion over a five-year period. Tax credit programs have failed to deliver on their promises in other states, too. The Mackinac Center for Public Policy in Michigan released a study in which it compared job estimates made by Michigan’s economic development agency accompanying tax credit awards to the actual outcomes of those programs. Mackinac found that only 7.9 percent of projects were completed on time and produced the number of jobs promised. Missouri cannot afford this failure rate.

A particular program may provide some social benefits, but the state has to weigh this against its cost. Dollar signs are missing too frequently from these discussions. Whenever the state of Missouri awards a tax credit, that credit comes at the expense of other activities. A dollar spent on tax credits is a dollar that the state must cut from another program. The state should consider whether the social benefits of, say, increased wine production, film production, or vacant land assemblage are worth cutting the budget of another state program.

In addition, another recent audit by the state auditor found that the Department of Economic Development (DED) had a 43-percent error rate just when recording estimated jobs and investment figures from businesses receiving enterprise zone tax credits. In one instance, the DED inflated a business’ investment estimate by 333 percent.
Given this amount of misinformation, how can the state possibly have a chance at encouraging the right businesses and industries? The government has no special ability to predict which businesses and industries will succeed, yet tax credits are an attempt to identify and subsidize future successes.

Tax credits often don’t create economic activity, but instead merely shift it to another location. When states compete over companies by offering increasingly generous incentive packages, taxpayers lose because they have to foot the bill. As a recent example, while Ford lobbied for $150 million in tax incentives from Missouri, Ford also courted Kentucky, Michigan, Ohio, and Illinois for financial assistance, communicating the message that it would locate within the borders of the highest bidder. This is a very expensive game, and taxpayers everywhere would be better off if their state governments stopped playing.

Even if other nations, states, or localities offer tax incentives to lure businesses, Missouri would be better off if we don’t do the same — because we benefit from the lower prices that those subsidies create, without it costing Missouri’s taxpayers a dime. It would be better for everyone if all states stopped providing these subsidies, but Missouri will still experience better economic growth if it unilaterally removes itself from the tax incentive bidding wars.

Missourians would benefit if the state government took a hands-off approach to economic development instead of providing subsidies to private companies. Missouri’s tax credit programs have not fulfilled their stated purposes, and spending more on them will not likely result in better outcomes. Missouri’s tax dollars would be much better spent in the hands of individual Missourians than on enticements for companies like IBM and Ford.

If Missouri’s state government officials are serious about promoting economic development, they will stop attempting to pick and choose the economic activities that occur within its borders. Centrally planned economies have never worked, and that strategy won’t work for Missouri, either.

Christine Harbin is a research analyst for the Show-Me Institute, a Missouri-based think tank.