What Do Academic Studies Say About Tax Credits?
During the recently-completed not-so-special Missouri legislative session, some lawmakers continued to push for a new set of tax credit programs, arguing that tax credits can encourage economic growth.
Today, the Show-Me Institute is releasing a new policy study on the effectiveness of tax credits: “Tax Credits as a Tool of State Economic Development Policy.” This study, by Howard J. Wall, director of the Institute for the Study of Economics and the Environment at Lindenwood University, reviews academic studies of tax credit programs in other states and discusses some of the broad arguments made in favor of tax credits.
One of the most striking findings in Wall’s study is the following: “State tax credits do not tend to lead to higher levels of employment for local residents, nor, by extension, do they lead to higher levels of employment for state residents.”
Consider the academic evidence:
- In a 2009 Michigan study, the authors found that tax credits were associated with a decline in employment.
- Some academics say that tax credits would be effective if used in distressed areas. However, an Ohio study found that tax credits generally are not awarded in distressed areas – a pattern that I suspect exists here in Missouri. Just look at The Chase Park Plaza, a luxury hotel and recipient of a great deal of tax credit money.
- In fact, tax credits may be awarded to companies that would have expanded anyway. A Georgia study found that 75 percent of tax credits were awarded to companies that would have hired more workers without receiving tax credits.
- There have been three prominent surveys of tax credit research in recent years. None of the surveys concluded that tax credits are an across-the-board, effective tool. In fact, one concluded that legislators should abandon tax credits altogether.
Most academic research on tax credit programs across the U.S. has shown that tax credits don’t work. Why do some legislators think that the situation in Missouri is any different?