Study Shows Tax Breaks Are Inefficient

February 6, 2013

Around the country, states use their tax codes to incentivize certain behaviors or industries in order to achieve a desired result. Colloquially referred to as "tax breaks," these incentives use taxpayer funds to subsidize businesses and corporations with the intent of generating long-term benefits, usually higher tax income in the future. A new joint study between the Reason Foundation and the Howard Jarvis Taxpayers Foundation conducted by Adam Summers and Ankur Chawla, a senior policy analyst and a research assistant at the Reason Foundation, respectively, examines California's use of tax credits and whether they are effective at providing a net gain for the economy.

  • At the end of 2012, California passed a two-year, $200 million extension of the state's film tax credit.
  • Summers and Chawla call many of California's tax breaks "egregious," including the research and development credit, custom computer programs use tax, film credit, exemption for farm equipment, low-income housing credit, hiring credit and alternative energy tax credit.
  • When added together, the property, sales and use, corporate and fuel tax breaks totaled an estimated $2.51 billion dollars in lost general fund revenue.

Tax breaks are more costly than proponents believe. While proponents claim that tax breaks prop up industries and lead to growth, economic studies indicate that countries with freer markets grow more rapidly. Tax favors not only forgo revenue but also unnecessarily intervene with the efficient allocation of resources in a free market. This market distortion creates barriers of entry for new businesses and hurts competition, a force known to spawn economic growth.

  • Special tax treatment should be eliminated when the tax break's purpose is unclear or the tax break is not achieving the intended purpose.
  • A commission should be created that assesses whether tax breaks are necessary or effective, and require each tax break to have a clear statement of purpose by which to evaluate it.
  • Additionally, to limit the effects of political posturing and deal-making, a non-partisan commission made up of independent assessors should be created to determine which tax breaks are wasteful and thus expendable.

Source: Adam Summers and Ankur Chawla, "Tax Credits in California: Economic Growth Engine or Wasteful Corporate Welfare?" Reason Foundation, January 30, 2013.

 

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