A Reminder: Tax Credits Are Not Free Money
First, a picture:
Click picture to see Patrick Ishmael’s recent post on the DED and tax credits.
Every dot represents an address in Saint Louis that has been issued Missouri Department of Economic Development (DED) tax credits since 1999. The larger the dot, the greater the tax credit. Contrary to the misconception of many, these tax credits represent real taxpayer money: money that could have been used for other government functions, but wasn’t.
Let me give an example of how this all works with a quick story.
When I was growing up, I mowed my neighbors’ lawns for extra money. Economically speaking, this was a mutually beneficial exchange: I received $15, and my neighbor received a beautiful, cut lawn.
But now, let’s instead say my neighbor would not pay me more than $10, and I would not work for less than $15. I wouldn’t cut the lawn.
But what if the government promised me a transferable or refundable $5 tax credit for every lawn I cut – that is, a stipend against my taxes that I could redeem for cash or at near-face value to someone with a greater tax burden? I would cut the lawn because I’d effectively be receiving $15 for the work – $10 from the private sector and $5 from the government.
Yet how equitable is a system like that? Should the government give me tax credits to mow a neighbor’s lawn? If not, why not? The simplest response people have to this question is that in private transactions, parties negotiate for services. One way or another, the lawn gets cut; government distortion of the lawn-cutting market is unnecessary. Giving $5 to those who mow lawns is $5 less for roads, disaster relief, and other necessary government functions.
And yet, these market distortions nonetheless happen, even in generally no-nonsense places like the Show-Me State. More than $1 billion in tax credits have gone toward projects at about 2,200 Saint Louis City addresses, representing more than 45 percent of all the tax credits that the DED issued to the entire state. The problem? Saint Louis only makes up 5 percent of Missouri’s population.
A forthcoming case study will examine this issue further.