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Monday, February 25, 2013

Groups Raise "Corporate Welfare" Argument in California

This month, the Reason Foundation and Howard Jarvis Taxpayers Foundation released a 59-page report - Tax Credits in California - Economic Growth Engine or Wasteful Corporate Welfare?  The report suggests that California would be better off eliminating several corporate income tax and sales tax preferences applicable to corporations and lowering the corporate tax rate. The report also notes one property tax preference for certain computer programs (no mention of the favorable reassessment rule that corporations benefit from in the Prop 13 shaped property tax system).

Per the report:

"If these tax breaks could be eliminated and replaced with across-the-board tax cuts, California’s economy would benefit significantly from more innovation, more economic growth and greater satisfaction of consumers’ desires. The only real losers would be the companies currently benefitting from the tax breaks. As it is, special carve-out incentives for some mean higher tax rates for everyone else."

The report also notes that per data from the Legislative Analyst's Office (also from the Department of Finance), tax expenditures total about $30 billion annually in the personal income tax, $5 billion in the corporate tax and $9 billion in the sales tax. The report focuses only on the $5 billion. The tax benefits or "breaks" focused on in the report include the research expense deduction, research tax credit, film credit, hiring credit, expensing of timber growing costs, sales tax breaks for farm equipment and periodicals.

The report does a good job of explaining some of the key arguments against special rules in the tax system, such as lack of transparency and accountability and economic inefficiency.

But, I think the report does some disservice for these reasons:
  • Focusing on part of the $5 billion of corporate tax expenditures rather than the bigger amounts in the personal income tax ($30 billion per year) and the sales tax ($9 billion per year). And the sales tax total of tax expenditures does not include the billions not collected because California's sales tax system exempts consumption in the form of personal services and digital goods.
  • Focusing on "credits" in the title of the report and for most of the "waste."  Why not refer specifically to tax breaks or tax expenditures. Not all special tax breaks are tax credits.  In the personal income tax, the largest tax expenditures are deductions (such as the home mortgage deduction which is the largest of all tax expenditures) and exclusions (such as for employer-provided health care).
  • Not addressing potential benefits to the state of the research deduction and tax credit. California has a generous research tax credit and can serve as an economic development tool to attract high paying jobs. While the report notes some research questioning the value of this credit (which is already incentivized at the federal level), it overlooks other problems in California that may lead businesses to not want to locate in the state. For example, in California, companies pay sales tax on manufacturing equipment - something not owed in most states. The report calls for having more businesses pay sales tax by removing some current exemptions.
  • Why not more on property tax reform? (Yes, I know one of the co-authors is a strong supporter of keeping Prop 13 unchanged.) There are arguably some inefficiencies in the property tax as applied to businesses in that the same size and type of businesses may have drastically different property tax bills, which can cause competitive advantages and some businesses paying more so others can pay less.
But, I encourage reading of the report.  It is timely in that at the federal level, many elected officials are calling for base broadening - for both individuals and businesses. The report raises the profile of the cost of tax expenditures and raises some good points, albeit, in my opinion, with a few problems noted above.

What do you think?

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