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NM should rethink corporate welfare

Corporate welfare refers to government handouts and special protections granted to certain businesses to locate in a specific jurisdiction. Tax breaks, or as some observers call them tax incentives, have in particular become a popular device for state and local governments. new mexico politicians, whether Democrats or Republicans, have relied on tax breaks to attract new businesses.

Proponents argue that tax breaks are necessary to attract businesses and that their costs are offset by the additional tax revenue from the increased economic activity. They claim that to be competitive with other jurisdictions they need to offer tax breaks or businesses will go elsewhere.

Politicians see themselves entangled in a vicious cycle where they are competing with other jurisdictions to attract new businesses. They don’t want to appear indifferent to attracting businesses that can bring new jobs. What we have seen, with Amazon as a prime example (no pun intended), is jurisdictions driving up the tax breaks they are willing to pay to exorbitant levels. Analysts refer to this as the “race to the bottom.”

Businesses receive tax breaks on the order of $80 billion annually from state and local governments throughout the U.S. Studies have shown that these giveaways to businesses most times have little effect on their decision where to locate. Recipients who receive tax breaks often have political and economic clout that they leverage to gain favors at the expense of their competitors and taxpayers. It is a classic example of special interests benefiting at the expense of the general public.

At first thought, it seems audacious for government officials to expect poor households and small struggling businesses to allocate some of the taxes they pay to large, profitable businesses headquartered outside the jurisdiction (like Facebook). But their behavior shows that they would rather chance a groundless handout than be perceived as anti-job and anti-business.

While governments offer handouts with the hope of realizing greater economic returns, companies often make promises to create jobs they fail to keep. Handouts are often no more than a zero-sum game where one jurisdiction benefits at the expense of another. For many of them, the added revenue from the recipient business falls short of the tax break.

Tax breaks are just as likely to encourage perverse behavior and unintended consequences. They can shrink the tax base, shift tax burdens to other taxpayers or reduce public goods valued by the local citizenry.

Tax breaks also open the door to rent-seeking and corruption: large companies threaten to locate elsewhere unless they receive special treatment and even “bribe” officials with campaign funds in exchange for favoritism.

Instead of tax breaks, governments should create a good business climate with reasonable tax rates and regulations, and pro-growth public expenditures, such as for infrastructure development. States and cities can better satisfy this goal by broad-based tax cuts than by discriminatory and wasteful tax breaks where they play the role of picking winners and losers.

If governments continue to offer handouts to businesses, they should at least do a cost-benefit analysis. Experience has shown that officials often understate the true costs of the tax breaks and overstate the benefits, which should be no surprise.

Of course, one can imagine situations where a tax break could contribute to the economic well-being of the local or state citizenry net of the “subsidy” cost. But government officials should make that determination before offering tax breaks to any company.

What we frequently observe is the failure of government officials to provide the public with a transparent accounting of the actual costs of the tax breaks offered to businesses. New Mexico, like most other states, neglects to fully disclose all the details of its “tax break” packages.

It’s time either to stamp out tax breaks to businesses or to make government officials more accountable for their decisions. New Mexico taxpayers deserve no less.

Kenneth W. Costello, of Santa Fe, is a regulatory economist and independent consultant.

 

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