Expensive Tax Subsidies Require Accountability
Charleston Gazette - On the same day the Governor recently cut programs to prevent child abuse and domestic violence, he held a ceremony signing a bill that would give the Greenbrier Resort up to $25 million in tax credits. Unfortunately, some lawmakers and members of the media failed to see a connection between the two actions. In fact, one lawmaker told the Charleston Daily Mail: “I think those are two different issues.” Read
The fact is that tax credits and other economic development tax expenditures are virtually the same as direct spending in the state budget. This is because they result in the loss of revenue that would otherwise be collected. Every dollar that was spent in tax credits is money that could have been invested in our children, infrastructure or to lower everyone’s taxes, not just for those rich enough to hire the most well connected lobbyists.
While proponents of this “back door” spending say that they are “free” because companies would have not expanded without the subsidy, there is no evidence that this is the case. For most of these businesses, it is just a way to get free money.
And since tax expenditures are not subject to annual appropriations each year, they more closely resemble an entitlement program (e.g. Medicaid) than a discretionary spending program because any person or entity that meets the requirements for them can receive the benefits.
According to the West Virginia Budget Office, we will spend at least $209 million through the state tax code this year on economic development tax incentives. This doesn’t include the millions in property tax abatements and other tax credits local governments will offer to companies, many times without their knowledge. For example, Marshall County stands to lose over $10 million this year alone from a new gas processing facility because of legislation passed in 2011 that expanded the use of salvage value appraisals.
Unfortunately, we have little to no information about who receives economic development tax credits, whether they are working and what the impact is on the state budget. Without this information, we cannot evaluate whether this is the best use of our tax dollars. Wouldn’t it be useful, especially as we face serious budget shortfalls, to have a clear picture of the success or failure of past development efforts? The good news is that there is a lot we can do about it. Here are few suggestions:
- Conduct a thorough review of tax expenditures; from the archaic way we tax real and personal property to how we apply the sales tax to lawn services but not haircuts. - Give one agency responsibility over reviewing the effectiveness of tax credits and grants. Develop a system of checks and balances that are led by this agency.
- Publish all recipients of economic development subsides — including property tax abatements, land, equipment, tax credits and other tax expenditures — on an online searchable database that includes the amount of the subsidy, job-related outcomes, demographics and location. This should also include any subsidies that have been “clawed back” because the company failed to comply with the terms of the tax subsidy.
- Unlike the current 5-year-old data currently available for tax credit programs on transparencywv.org, make the same responsible agency mentioned above required to have easily accessible, timely information.
- Set up a legislative fiscal office to provide the resources necessary to forecast and project the effects of legislation including tax credits and proposed regulations. For example, if an agency properly reviewed the alternative-fuel tax credit in 2011, it could have saved our state over $100 million.
- Implement “sunset” provisions and caps on tax credits. This will ensure that lawmakers regularly review tax expenditures and that they cannot become unwieldy. By taking these steps, West Virginia can ensure taxpayers that they are getting the best bang for their buck and we may even be able to lower tax rates and create more efficiency and a more robust economy.
Ted Boettner is the executive director of the West Virginia Center on Budget and Policy (wvpolicy.org). Bill Maloney is the president of the Center for a Brighter Future (cfabf.org)