Tax Foundation’s Scott Drenkard Testifies on Tax Credits in Indiana
November 20, 2013
On Monday, Tax Foundation economist Scott Drenkard testified on state tax credits in Indianapolis at a hearing of the Commission on State Tax and Financing Policy. This is the second year that the commission has took on review of various tax preferences in Indiana’s individual and corporate codes. The state currently ranks 10th in the Tax Foundation’s State Business Tax Climate Index, and is in the process of phasing down rates in the individual and corporate income tax. From his testimony:
Even though credits lower the tax burden of a particular tax filer, in most cases we see them as poor tax policy. […] Some businesses might get the benefit of a preference, but other businesses that aren’t engaging in whatever activity is deemed “favorable” are stuck paying the full sticker rate of the tax.
[T]he academic literature is generally not kind to tax incentive programs. Additionally, states routinely issue reports on the efficacy of credits in their code, and often times they fail to meet even the most basic of cost-benefit requirements.
One of the more egregious examples I’ve run across was in Massachusetts, where their Department of Revenue found that $14.6 million in incentives was given to filmmakers in 2010, but the program only generated $800,000 in new state revenues.
Of the studies that find that tax expenditures have positive effects—these sometimes are conducted by industries that benefit from a particular preference—there are often problems with the assumptions built into the model. Most of these analyses contain some sort of economic multiplier. Multipliers show that a tax cut has ripple effects throughout the economy and creates economic growth many times over the size of the cut.
I’ve seen studies where the multiplier is truly unreasonable, but I’ve also seen studies that utilize moderate multipliers and show a positive job growth result from a tax preference. The rub is that it doesn’t matter what size multiplier you use. Most of these studies are misleading because they do not consider a basic economic concept: opportunity cost—or where the money might have been spent elsewhere.
[T]here are two ways that Indiana can compete with other states, and one is vastly superior to the other. The first way is by trying to pick and choose which groups get competitive rates. The better way is by offering one competitive low rate for everyone.
Read the whole testimony here.
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