Tax Credit Tradeoff Elusive To Measure

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This week I’ve been looking at some of Idaho’s business tax credits.  I spoke with a non-partisan expert, the state Department of Commerce, a state tax expert and a business owner.  I wanted to better understand the kind of tradeoffs the state is willing to make in order to develop new industries and expand existing companies in Idaho.  The one question I’ve found most difficult to answer is, do those tradeoff’s pay off?  It will be an ongoing question here at StateImpact.  For now, here is what we do know.

Idaho currently has nine different business tax credits on the books (not including tax exemptions).  The most popular, by far, is a three percent investment tax credit.  The Division of Financial Management estimates businesses will collect more than $33 million in investment tax credits this year. It’s popular because any company can receive a three percent credit on qualifying equipment purchases.  Qualified purchases include machinery, elevators, greenhouses, milking barns, research facilities, and just about everything in between.  What doesn’t qualify?  Apartment buildings and horses.  (You can see the full list here)

Michael Mazerov is a senior fellow at the Center on Budget and Policy Priorities.  It’s a non-partisan research and policy institute based in Washington, D.C.  Mazerov says all tax credits and incentives basically involve cutting a tax in exchange for doing something the state thinks will benefit its economy like creating jobs and stimulating growth.  But, he says, that often comes at a cost to the state.  “What you have to consider is the revenue loss (to the state) also results in the loss of jobs.”  Mazerov says when states don’t collect the revenue they’re giving out in the form of tax credits, states then don’t have that revenue to hire teachers, police officers, or contractors to work on state roads.

The Idaho Department of Commerce doesn’t see it that way.  Economic development administrator Lane Packwood says Idaho’s tax incentives ought to be thought of as state investments.  “There is more at stake than simply ‘lost revenue’,” Packwood says.  “When I invest in my Roth IRA, I don’t think of that investment as ‘lost revenue.’ I think of the greater future payoff down the road as a reward for fiscal restraint today.”

Unlike tax credits, you can pull your money out of a Roth IRA.

In 2010 the Center on Budget and Policy Priorities published an article titled “The Zero-Sum Game: States Cannot Stimulate Their Economies by Cutting Taxes.” It says states can’t effectively create jobs by offering targeted tax cuts or credits.  “It is at best a zero-sum game, where the gains in one area are offset by the losses in another.”

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Still, Dan John, tax policy manager at the Idaho Tax Commission says the benefits of Idaho’s business tax credits are there, just difficult to measure on paper.  “When we put together numbers, we put together what we know, what is on tax returns,” says John.  “We don’t know all of the upsides of the tax credit…anecdotally, you know what’s going on, you just don’t have something that’s as simple to put down on a piece of paper.”

Mazerov, at the Center on Budget and Policy Priorities, says the research concludes a state would need to cut the tax burden of a business by ten percent to encourage just two percent in job creation.  “So, it’s just better for states to be focusing their economic development efforts on doing their basic job, well,” says Mazerov.  “Having a good education system, having a well-functioning road system so businesses have their services they need and the skilled workforce they need.  In the long run, that’s the best economic pay off for the state.”