It used to be an article of faith among governors of high-taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. states–at least publicly–that tax burdens did not drive business decision-making, and certainly did not affect location decisions. This public show of confidence was always belied by the lengths states go to offer tax incentive packages to attract and retain businesses, and increasingly the façade itself is crumbling.
Witness, for instance, the protests of Northeastern governors that, absent an uncapped state and local tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions. to disperse some of the burden of their high taxes across the country, people will flee their states. Or just look to New York Governor Andrew Cuomo (D) with his explanation of why the state offered so much to entice Amazon to Long Island:
Gov. Andrew Cuomo defended the deal, arguing that New York has to offer incentives because of its comparatively high taxes. At 6.5 percent, New York’s corporate income-tax rate is only modestly higher than Virginia’s 6 percent, according to the Tax Foundation. But other business and individual taxes are higher in New York.
“It’s not a level playing field to begin with,” Mr. Cuomo said in an interview Tuesday [with The New York Times]. “All things being equal, if we do nothing, they’re going to Texas.”
This is a weak argument for the state ponying up $1.7 billion, on top of about $1.3 billion in local tax incentives for which the new facility may be eligible, to secure a $3.7 billion investment from Amazon. It is, however, a compelling argument for reducing tax burdens across the board, for making that playing field more level both within New York and between New York and other states.
Governor Cuomo is right: it’s not a level playing field. But imagine how much more competitive the state would be if policymakers were focused on a broadly competitive tax environment rather than throwing billions of dollars at one company. At the end of the day, the best economic development incentive you can have is a system that is competitive to all comers, not just the favored few.
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