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State and Local Government / Transparency

“Everything Is the Same Even if It’s Different.”

By Christine Harbin on Jul 8, 2010

I recently received a thought-provoking email from a Show-Me Daily reader. This person writes:

The more I read your posts on the Show-Me Daily site, along with those of some of your colleagues, the more puzzled I become. You are all mixing up apples, oranges, pears, cantaloupes and watermelons and acting as they are all the same. They aren’t. […]

Tax abatements, tax credits and tax increment financing (TIF) have all been in the news recently. Tax credits are very different from tax abatements though they are often reported on as if they were the same.

It’s true that tax abatements, tax credits, and TIF are structured very differently, and my tendency to lump them together is probably more confusing than I realize. I thank the reader for pointing this out to me.

Tax credits reduce a company’s or individual’s tax liability, dollar for dollar. Tax abatements function by exempting a company’s or individual’s burden altogether. TIF generates money for a project by borrowing against future property tax revenues. There are additional ways in which the government intervenes in the market that are structured differently still, such as occupational licensing requirements, zoning codes, and mandates.

I tend to discuss these policies ensembles because they have many of the same negative consequences. Each of these policies distorts the market considerably — by inciting shortages and surpluses, by encouraging individuals to buy products that they otherwise wouldn’t, by luring favored businesses to locate within the region, and by driving unfavored businesses out. They also give an artificial competitive advantage to select groups, and make it harder for others to enter and compete in the marketplace.

As an additional negative consequence, these policies carve out sections of the tax base for a favored few, and push the burden onto everybody else. The problem with this is that the favored few are still consuming goods and services, and the unfavored many have to pay for them. For example, if there is a fire at a tax-abated property (e.g., a city building, a church, or a nonprofit), the fire department will still come to the property to extinguish the fire, but the land holder will contribute comparatively little or no revenue via property taxes.

This reminds me of the following line in I ♥ Huckabees, which is one of my favorite films:

Albert Markovski: Everything is the same, even if it’s different.

In the context of government intervention in the marketplace, the consequences of these policies are (reasonably) the same, even if their structure is different.

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Christine Harbin

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