“If Missouri Will Issue a Dollar for a Tax Credit, It Should Get a Dollar Back”
Last week, I attended the first meeting of the Tax Credit Review Commission in Jefferson City. In his opening remarks, co-chair Steve Stogel communicated a long series of “big ideas” related to state tax credits. Most of them were questions that he wants the committee to answer. The first big idea, to which I will devote this blog post, was the following: “If Missouri will issue a dollar for a tax credit, it should get a dollar back.”
First, as Stogel subsequently started to discuss, this begs the question of what to measure and what to define. This is often very difficult. Is this dollar generated in the same year? Over 10 years? Is this a dollar of general revenue? of general and local revenue? A dollar of economic activity in the private sector?
Even if we were able to measure the consequences of a particular tax credit program accurately and consistently, there exist further questions. For instance, what is the significance of $1? Why is the goal not $2? Why is it not 50 cents? What is the suitable ROI that the state of Missouri is seeking in its economic development expenditures? How could the government know what the optimal level is?
If Missouri issued $1 in tax credits and got $1 back, then what’s the point? The state economy would be back to where it started from, minus administrative and transaction costs — not to mention deadweight loss.
Economic development policy relies on the existence of a “multiplier effect.” As the Show-Me Institute’s chief economist, Dr. Joseph Haslag, recently explained in an editorial in the Columbia Business Times, the ability of tax credits to incite resonating economic activity is dubious at best:
No magic multiplier effect is created because of the government tax credit. Rather, the evidence points to a substitution from all other industries to the ones receiving the tax credit. […]
The evidence […] suggests that no such spillovers or multipliers arise. For one thing, the city’s tax base has shrunk. To supply the same number of services, revenues must be made up by applying a larger-than-otherwise tax rate to the remaining tax base.
Furthermore, because government expenditures tend to crowd out private investment, much of this economic activity (e.g., hotel stays, restaurant meals) would have been generated by individuals in the private sector.