State Tax Code Cronyism

July 29, 2014

Cronyism in the tax code distorts economies and creates an uneven playing field. In a report for the American Legislative Exchange Council, William Freeland, Ben Wilterdink and Jonathan Williams explain why tax carve-outs are nothing more than subsidies under a different name and run counter to sound, fair tax policy. 

Lawmakers can encourage economic growth through the tax code in two ways. They can impose low, broad-based taxes without preferences or carve-outs. Or, they can target industries and businesses with tax breaks and preferences.

The latter option, which the authors deem the "growth through central planning approach," creates unfair advantages for some businesses over others. It is cronyism -- the use of policy to benefit a specific group or industry -- and all 50 states have some degree of cronyism in their tax codes.

It is difficult to track state tax cronyism because states measure tax expenditures differently, and some states rarely, if ever, issue a report on tax carve-outs (Alabama, Alaska, Nevada, South Dakota and Wyoming are the five states that issue no reports on their tax breaks). The authors analyzed the numbers that are available:

  • Using the most recent year's reporting available from each state, states granted $228 billion in personal income and business tax exemptions and $260.1 billion in sales tax exemptions.
  • States also give targeted tax breaks to individual firms. Over the last 20 years, states gave 157,072 in grants to individual companies, according to the New York Times.

The authors explain that tax breaks have the effect of increasing taxes for everyone else: When states issue carve-outs to small groups, tax rates must necessarily rise in order to compensate for the diminished tax base. Favored industries and businesses receive lower tax bills at the expense of those businesses and industries that have not received government favor.

Source: William Freeland, Ben Wilterdink and Jonathan Williams, "The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth," American Legislative Exchange Council, July 2014.

 

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