Blindly Picking Winners and Losers

Facing declining tax revenues, Gov. Jay Nixon is pushing a proposal to cap the amount that Missouri hands out in tax credits each year. Tax credits, which reduce a recipient’s tax burden dollar for dollar, are transferable and are nearly as good as cash. Missouri awards tax credits for specific categories, such as redevelopment, housing, business recruitment, and agriculture. Businesses and individuals don’t receive tax credits automatically; they have to apply for them.

So far, the arguments for and against capping tax credits has circled around the issue of whether tax credits encourage economic development, job growth, and other activities that are in the best interest of the state. Proponents argue that tax credits are beneficial: The state gets more than what it pays out (because of the so-called economic multiplier), they say, and so capping tax credits would hurt the state as a whole. Those who oppose targeted tax credits argue that the loss of revenue given away by the state to a few recipients — but collected from the rest of the state’s taxpayers — far outweighs any benefit accrued from the activities that such credits encourage. Furthermore, as Show-Me Institute Research Analyst Christine Harbin has written, when state legislators create targeted tax credits, they are favoring one industry over another, frequently because of political pressure.

Yet another argument against state tax credits is the fact that state governments have demonstrated that they are often incapable of a substantive review of tax credit applications. As a negative consequence of this lack of oversight, these programs invite fraudulent activity. In Iowa, three film production companies have been charged with inflating the values claimed on tax credit applications, and the director running the state’s film tax credit program was fired because of the lack of oversight. From the Quad-City Times:

The invoices also included various sizes of step ladders that ranged from $900 each up to $1,125, and a 24-foot extension ladder reported to have been rented for $1,350.

There are many additional examples of fraudulent activity resulting from a lack of oversight. In March, the state of Michigan awarded a $9 million business tax credit to a convicted embezzler who promised to create 765 jobs in Flint. He did this all while living rent-free at a friend’s mobile home. Earlier this year in Louisiana, a man was charged with selling nearly $2 million in Louisiana film tax credits to members of the New Orleans Saints. He never filed for them.

I suspect that Missouri’s Department of Economic Development may also occasionally miss tax credit application discrepancies. Based on a cursory review of the recently approved application for $19 million in Distressed Areas Land Assemblage (DALA) tax credits submitted by a Saint Louis–area development company, NorthSide Regeneration, LLC, it appears that the company overstated its costs for at least five properties (third column of DALA tax credit application PDF documents contain the property’s reported purchase price):

These problems are inherent in a bureaucratic program tasked with awarding benefits, and operating with limited information. The paperwork accompanying a tax credit application is usually substantial, and even if the agency charged with administering a state’s tax credit program does due diligence, the information available can be limited to what the tax credit applicant supplies.

The tax credit fraud cases that do make the news are egregious. I am sure there are instances of companies padding their reported costs on tax credit applications that the state and general public have missed. Instead of using public dollars to attempt to pick winners and losers, while running the risk that the state may not have all the available information even to weed out tax credit fraud and application discrepancies, the state should let consumers and investors decide which businesses, developments, and films succeed.