Playing Favorites With Tax Credits
Last Thursday, the governor cut $47 million from the state’s annual $600 million tax credit program. This program grants incentives to businesses that officials deem as providing some benefit to the community. The cut was made in an effort to balance the state budget in the face of decreasing revenues from Missouri’s slow economy.
Only two weeks ago, though, the governor advocated an incentive package for Ford Motor Co. worth $15 million per year for the next decade, aiming to keep Ford in Missouri. Ford’s Claycomo plant employs 3,700 Missourians, jobs that no politician wants to lose to another state, especially when Missouri is facing unemployment between 9 and 10 percent. The governor said he may call the legislature into a special session to pass the the package, even before receiving assurance from Ford that the plant will stay if the bill passes.
Tax credits generally entail some amount of dead-weight economic loss, as has been extensively discussed on this blog before. By subsidizing those industries or companies that state officials view as most important, tax credits will tend to distort natural aggregations of supply and demand. And no matter how carefully they choose which companies or industries should be the recipients of tax credit policy, public officials have no special ability to choose the right mix of industries or predict which one might maximize economic growth.
Many companies have come to rely on maintaining their profits through use of those tax credits that have been subject to recent cuts. Telling them to tighten their belts while at the same time handing out $150 million in incentives to Ford just isn’t fair. Tax credit cuts are necessary, and more cuts are needed, but simultaneously crafting a piece of legislation full of tax incentives for Ford makes it look like the state is just playing favorites.