Another Blow for Corporate Welfare

Source: “Review of the California Competes Tax Credit,” Legislative Analyst’s Office, California Legislature

Fans of “business incentives” as a key source of “economic development” should read a new report by the Golden State’s Legislative Analyst’s Office. It’s an exploration of “California Competes,” a tax-credit program that “provides tax benefits to select businesses in exchange for meeting contractual hiring and investment targets.”

The LAO found that the program is founded on profoundly faulty economics. For one, it provides windfall benefits to some enterprises, but not others. As an example, it contrasts “Alex’s Plumbing Co.,” which applies for a California Competes award, with “Zoe’s Plumbing Co.,” which does not. “[S]hould Alex’s receive a tax credit, it would have a competitive advantage over Zoe’s — perhaps Alex’s would be able to pay its employees somewhat higher wages and charge a little bit less for its services. Alex’s receives a credit if it hires ten new employees. However, in this example, the total demand for plumbing services in the town can only support a total increase of six new plumbing employees. Zoe’s must therefore lay off four employees.” (See graphic above.)

Then there’s the opportunity cost — the “resources that would have otherwise benefited the state’s residents” given up when government subsidizes businesses. “California Competes will reduce state revenues by up to $780 million over about 15 years, resources that state policymakers could otherwise use to fund other state programs, reduce debt, or allow for alternative tax reductions. Whatever this foregone revenue would have funded would have benefitted the state’s residents in some way.”

LAO recommends that the legislature end California Competes, and adopt “a broad-based policy change generally applicable to all businesses.” Possibilities include “reducing the corporate tax rate,” “reducing the minimum tax (under current law, nearly all business entities annually pay a minimum tax of $800 regardless of their net income),” and “other policy changes to improve the state’s business climate generally.”

New Mexico, like every state, has its own tax-break giveaways, from the High-Wage Jobs Tax Credit to the Rural Jobs Tax Credit. They’re not working, because they can’t work. The LAO’s report offers a bracing shot of reality for defenders of corporate welfare. It should be required reading in the Land of Enchantment.

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