When Mayor Richard Berry said that he would offer incentives to firms that agree to create jobs in Albuquerque, he provoked criticism from those who see major problems with this approach.
Tax breaks sometimes cost cities plenty when favored companies flop. Even when the subsidized industry prospers, like the pampered filmmakers, the taxpayers can find themselves locked into a long-term obligation that costs far more than it’s worth.
Libertarians hate this governmental intrusion. If you want to stimulate the economy, they advise across-the-board tax cuts, or even the elimination of the income tax.
But let’s face it. To recommend elimination of the income tax is in reality advice to do nothing. It’s just not going to happen in New Mexico, whose Legislature staggered through its latest session barely able to avoid tax increases.
So let’s assume away political reality.
We know that low taxes will attract companies and people from other states, but it’s awfully hard to quantify the economic impact.
Tax cutters cite the federal tax cuts by Presidents Kennedy, Reagan and Bush. But these were far more powerful than any state tax cut that might happen because state income tax rates and revenues are so much smaller as a portion of the state economy.
Local libertarians, seeking evidence that Gov. Bill Richardson’s tax cuts helped the economy, cite data on personal income per capita. New Mexico climbed from 47th place to 42nd place in years chosen to represent the time during which the top income tax rate gradually came down 3.3 percentage points.
This proves nothing.
Other factors that affect income need to be held constant, otherwise you’re giving too much credit to tax cuts. The rankings mask very slight differences in income, some of which are within the statistical margin of error. Other measures, looking at New Mexico versus the rest of the nation (not just the lowest states), show little or no evidence of the tax cuts.
It’s true that states with no income tax are more prosperous than states with an income tax, but which one caused the other? Higher income allows lower income tax rates to cover the cost of government.
Moreover, some of these no-income-tax states have higher sales and property taxes, so there is less variation among states in overall taxation. In summary, lower tax rates are fine, but don’t count on them for big results at the state level.
So what about targeted tax incentives? Admittedly there have been vast failures of attempts to pick winners. Currently Albuquerque is trying to recover $492,000 in tax breaks to a now-defunct call center.
But there are advantages.
A well-designed incentive will create more jobs per dollar of lost tax revenue than would a reduction of, say, two percentage points of a state’s top tax rate. The reason is that the incentive could be targeted to one firm and made to be worth much more to that firm than a statewide tax cut, and at a small fraction of the lost revenue.
Of course, by assuming that the incentive is “well designed” I am essentially assuming the conclusion.
Enter the human factor, namely that some governors and mayors are careful with money while others are not. Bill Richardson and Martin Chávez were not exactly “careful with money.” But at last we have two smart, thrifty people in these jobs.
I expect them to reject all but the most advantageous incentive deals.
Proposed companies should not be allowed to get away with preposterous estimates of jobs created. Taxpayers should be protected against costs of failure.
Don’t expect miracles, but don’t expect more fiascoes, either.
