Gun Manufacturers Respond to Tax Incentives

August 13, 2013

This week, the New York Times reported that, thanks to growing hostility towards gun manufacturers in the northeast as well as stringent new gun control legislation, manufacturers are moving to more gun-friendly areas. Meanwhile, southern and western states with strong gun cultures—such as South Carolina and South Dakota– are successfully “recruiting” gun manufacturers. What is less obvious from the NYT article, but equally important, is that it wasn’t just gun control alone that pushed these companies to move.

Rather, the manufacturers may have also been responding to tax incentives. The case of PTR, an assault rifle manufacturer currently based in Connecticut, is particularly telling:

For PTR, tax credits, cash grants and other incentives helped make the move to South Carolina worthwhile, Mr. Fiorini [PTR’s Chief Executive] said. For one thing, PTR will not have to pay rent at the new facility near Myrtle Beach, S.C., while it still occupies the old factory in Bristol. Mr. Fiorini added that the incentive packages from Texas and South Dakota were also generous, but in the end he chose South Carolina in part because it was a shorter move…“Were we all sort of pissed off about the legislation? Yes,” he said. “Were we pissed off enough to spend millions of dollars to move? No.”

We have written previously on tax competition, even defending it before the Supreme Court in an amicus brief. This occurs as different taxing jurisdictions (states, municipalities, or, more as we’ve written on more recently, countries) compete to lower rates or offer more incentives to convince companies to invest within their borders. When tax competition leads taxing authorities to create lower, simpler taxes, it’s a good thing; but when states compete using distortionary incentives and wasteful subsidies, as seems to be the case for these gun manufacturers, we’ve often criticized them.

Regardless of the type of tax competition—good or bad—this still demonstrates that taxes do in fact matter to businesses. If they did not, why would states offer such lucrative tax incentive packages to firms, attempting to lure them in? Often times, however, if a state has to offer such generous tax benefits, it’s likely because the state’s tax system is prohibitive in the first place. Rather than spending valuable state funds on tax benefits targeted at specific companies, industries, or activities, states would do well to use that money to simplify and improve their tax codes for all types of businesses—for example, by lowering rates and broadening bases.

As PTR’s CEO noted, companies make location decisions for many reasons. It seems that in this case, it was the combination of regulatory policy change, distance, and cost that ultimately sparked PRT’s move. But one thing is true: taxes mattered.

More on bad vs. good tax competition.

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