Earlier this month, Idaho Gov. Butch Otter signed a new state law that will refund up to 30 percent of state corporate income taxes, payroll taxes and sales taxes for any business that creates 50 new jobs in urban areas or 20 in rural areas. This new tax incentive will supposedly lure big employers to our state and expand the economy.
Limited tax incentives, however, do little for long-run employment and economic growth.
In 2011, Otter signed a law providing tax credits for companies that would hire just one new employee over the course of the year. There is little evidence that this program brought any new businesses to the state or helped existing businesses expand. The Idaho Department of Labor reports that the nonfarm employment is still below 2008 levels.
Idaho already has programs for businesses that build new facilities and hire workers with above-average salaries qualifying them for investment tax credits and real property tax breaks. Evidence suggests these special tax incentives do little to promote job growth.
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For example, a study on Indiana and neighboring states conducted by researchers at Ball State University measured the impact of state tax incentives using two statistical approaches. The researchers concluded from the first approach that the effect was "sufficiently small to be viewed as zero for policy purposes." Under the second approach the incentives did little to create jobs in higher-wage industries, such as manufacturing, meaning the costs of the program exceed its benefits.
It turns out tax incentive programs can be very costly. According to the Institute on Taxation and Economic Policy in Washington, D.C., local governments devote about $50 billion of their annual budgets to tax incentives with little to show for it. Even further, the programs create "a drag on national economic growth" because of the additional borrowing or other taxes needed to cover the programs.
Proponents of business development incentives like these argue there is a "multiplier effect" from new businesses and new jobs in certain sectors. Such arguments rely on the theories of Keynesian economics, which economists have long debated.
A 2011 report in the Journal of Economic Literature summarizes years of research on the multiplier effect for government purchases and found it can run anywhere between 0.80 and 1.5. This means government spending can sometimes lead to a overall loss of 20 cents for every dollar the government spends.
The multiplier effect for changes in tax policy is harder to estimate but more likely to be a loser. In 2008, economist Mark Zandi told Congress that a corporate tax reduction would have a multiplier less than one. A 2012 study by the Congressional Budget Office found the output multiplier for tax incentives to high-income households, many of whom own their own businesses, was at best 0.60.
State taxation of any business income leads to an inefficient game of government give-and-take for exemptions. Why not help everyone in the state by eliminating the business income tax altogether? We know this cost of doing business gets passed on to consumers through higher prices or on to workers through lower wages.
Policymakers should end the no-win game of tax incentives.