In his annual address to the business community earlier this month, Idaho Gov. Butch Otter touted the economic benefits of the state’s Tax Reimbursement Incentive (TRI) program. He quoted Idaho Commerce’s claim that this program returns more than 400 percent for every dollar the government “invests.”
That’s a great return.
Unfortunately, economic theory and historical evidence give weight to the old adage, “What sounds too good to be true, probably is.”
Just follow the logic. If we get a $4 boost for every dollar we give up in business taxes, why not eliminate all business taxes and create an economic boom?
Putting that aside, what are these business incentives supposed to do? Idaho’s TRI program provides refunds of 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. The program supposedly has lured 15 employers to our state and encouraged 14 existing businesses to expand.
Proponents of business development incentives often try to make the case for a “multiplier effect,” but such arguments rely on dubious assumptions.
The most glaring assumption is zero opportunity costs. The 4-to-1 multiplier assumes that all jobs created from the incentive are new, and these employees wouldn’t work or spend money otherwise. Such an assumption is true only if Idaho’s labor force expands by the same amount — which, if true, would have grown the economy anyway.
The second problem is the limited empirical evidence behind claims of a multiplier effect from government tax policy. A 2015 study published by the National Bureau of Economic Research found it was greater than 1 only during periods of economic recession. A 2012 study by the Congressional Budget Office found the output multiplier for tax incentives to high-income individuals such as business owners was, at best, 0.60.
State taxation of any business leads to an inefficient game of government give-and-take for exemptions. Idaho already has one of the highest corporate tax rates in the country. Why not end this no-win game and eliminate business taxes altogether?
Peter Crabb is professor of finance and economics at Northwest Nazarene University in Nampa. firstname.lastname@example.org. This column appears in the June 21-July 18, 2017, edition of the Idaho Statesman’s Business Insider magazine.