The news of the day is that President-Elect Donald Trump and Vice President-Elect and Indiana Governor Mike Pence have together secured a deal to keep a Carrier furnace plant in Indiana. The plant will retain 1,000 jobs that the company was planning to move to Mexico. Some thoughts that are important for media and taxpayers to consider:
1. There is both a state and a federal component to this story. The state part of the deal is relatively straightforward: Carrier will get $7 million in 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. incentives from Indiana over 10 years, which is not actually that large of an incentive. I’m quoted in the Hill today as saying: “In any other state, a $7 million incentives package is otherwise known as ‘not news.’”
2. The federal component of the deal is what we know the least about. Carrier’s statement points to Trump and Pence emphasizing their commitment to improve U.S. business and tax competitiveness. There has been some speculation that another reason Carrier will not move their plant is fear of losing $5 billion to $6 billion in federal contracts that their parent company, United Technologies, receives. Should federal contracts be awarded to companies based on what their most recent plant location decisions have been? I’m inclined to think no. Common wisdom is that federal business should be carried out by the contractor that will do the best job at the lowest price. Federal Acquisition Regulations generally—and competitive bidding requirements particularly—are structured with that as the end goal so that favoritism doesn’t affect contract awards.
3. This deal is primarily about showing action on a campaign promise. Donald Trump as a candidate started using Carrier as a go-to example of “jobs shipped overseas” with increased frequency leading up to the election, with a spike in internet mentions of Trump and Carrier in October (and of course the most mentions of them this last week).
4. Tax incentives are, as regular TF readers know, not supported as good tax policy by either theory or empirical literature. Good tax policy has a broad tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. and low tax rates. Special tax abatements, exemptions, exclusions, deductions, and credits all narrow the tax base, meaning a higher overall rate is required to bring in the same amount of government revenue. The latest survey of the empirical literature on tax incentives finds that most studies show tax incentives to be linked with statistically insignificant effects on the broader economy, or negative economic outcomes.
5. Giving deals to companies that threaten to leave will increase the number of corporate threats to relocate. This one is simple but also is getting less airtime. If you give a mouse a cookie…
6. No amount of “deals” can ever truly put this issue to rest, only comprehensive tax reform can. Some of the draw for companies to move a manufacturing plant to Mexico is based on labor costs, and the United States doesn’t necessarily want to compete on having the lowest wages of any country. However, we can compete on having a simple, low rate, broad-based business tax code.
We can also make a tax code that has international components that tax companies based on where they make their profits (a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. ) or where they sell their goods and services (a destination-based system, as proposed in the House GOP Blueprint plan). Our current international tax provisions, by contrast, tax companies based on where their headquarters is and tax all their profit obtained from anywhere in the world. This is why companies have recently been “inverting,” or moving their headquarters.
Unless we fix these issues, we’d find ourselves cutting quite a lot of deals to try to convince companies to stay or relocate and grow here. It would be much better to have a system that is open and competitive to all comers.
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