A superior economic development policy rests on a foundation of low, broad, transparent and easily-compiled taxes. Grounding economic development on these principles is especially necessary with increasing economic competition among the states. Other states are beginning to follow the Texas model, enacting policies that make them more competitive and attractive to business. Wisconsin enacted collective bargaining reform; Michigan is now a right-to-work state, as is Indiana. Pennsylvania has pursued development of the Marcellus Shale. Kansas and Louisiana are considering the elimination of their personal income taxes, with Louisiana also considering the elimination of their corporate tax. This is a positive development in an otherwise dreary fiscal and economic climate:
State competition for jobs should be a good thing that promotes fiscal stability, low tax rates, dynamic labor markets, balanced regulatory environments and responsible investment in infrastructure and human capital. These—and not one-time tax breaks—are the factors that are most likely to attract employers and drive good jobs policy.
As a general matter, lower taxation promotes economic growth, and so a growth-minded government should always implement low taxes on a broad base of taxpayers. Governments may also choose to incentivize or dis-incentivize specific behaviors with a targeted tax policy. It is axiomatic that whereas an increase in taxation tends to discourage the behavior taxed, a decrease in taxation or, still more, the provision of government resources as by grant or subsidy, will tend to encourage the behavior in question. Governments may incentivize behavior in this manner for a variety of reasons, including to increase employment through higher economic growth, and to attract capital investment.
There are inherent dangers in government assigning itself such a role. Typically, the free market will encourage growth-oriented behavior, and the heavy hand of government interference rarely, if ever, tips the scales in a positive manner. There is a danger to “corporate welfare,” both fiscally and politically, and many subsidy, grant, or incentive programs have failed. That is especially true at the federal level, most notably — but hardly exclusively — through the $535 million Department of Energy loan guarantee that funded Solyndra. An article by the Heritage Foundation puts many of these programs in perspective:
[S]ubsidies change the behavior of businesses. An economist once quipped: “I don’t know whether the government is better at picking winners rather than losers, but I do know that losers are good at picking governments.” When the government starts handing out money, businesses with weak ideas get in line because the businesses with the good ideas can get private funding. Enron, for example, was able to grab huge federal support for its disastrous foreign investment schemes.
Because of these well-reported troubles, the public has a very negative view of subsidy programs. In a survey of likely general election voters commissioned by TCCRI in late October 2012, a strong sixty-eight percent majority expressed support for eliminating business subsidies. With rare exceptions, this point of view was consistent across disparate ideological, regional and ethnic demographics.
The best economic incentive is a system of low taxes, minimal regulation, and small government. However, all states – including Texas – have, to one degree or another, instituted highly targeted economic incentives. Because of this, informed entities doing business in Texas (or considering such) will consider the incentives provided not only by this state, but by other states and foreign countries, and choose to operate where the greatest advantage exists. Furthermore, since states will continue to amend their policies to increase their competitiveness, constant review is necessary to ensure that Texas incentives remain effective or should be abolished otherwise.
Download the full report, A Review of Select Texas Economic Incentives (PDF)