Should municipal governments offer tax breaks to some?
Recently, the Flagstaff City Council turned down a tax incentive proposal for a local car dealer. Scott Baugh, who owns Planet Nissan Subaru Jeep, would have received a four-year tax rebate in exchange for bringing a Chrysler-Dodge dealership back to Flagstaff. Flagstaff Business News asked some experts to address the controversial issue of tax incentives and the role of municipal governments.
“Local government does not have a vast flux to give all sorts of breaks,” said Jerry Kremer, expert and lobbyist who helps businesses receive incentives for economic development from local governments. “But ten-year property tax abatements are common tax breaks offered by municipalities or counties. Other types of tax breaks – which are really fee breaks – include waving use fees, holding assessments at stable levels, or not taxing on improvements. Municipal governments also have the ability to help businesses with capital for improvements by funding road improvements such as curb cuts.”
Pointing to one tax-break success story, Kremer, chairman of Empire Government Strategies, said, “Canon got $100 million in combined benefits to build its new U.S. headquarters in Melville, New York. In return for that, they are building a $636 million headquarters facility that creates or retains more than 2,000 jobs in the area.”
Dennis Foster, Ph.D. at the W. A. Franke College of Business might not see the Canon story as good news. “When government starts going down that road, it is a mistake,” said the Northern Arizona University economics professor. “I think that most economists wouldn’t disagree: as a general principle [giving tax breaks to some businesses and not others] is not a good idea. It’s not motivated by a sound economic strategy. I might be more extreme by saying there is something wrong about the local government giving someone a special advantage.”
The self-proclaimed Austrian School economist continued, “Government planning can’t replace the market. Resources can’t be allocated efficiently by politicians looking for votes, as opposed to entrepreneurs that are looking for profits. As with the Aspen Place development – why does the government think that it can do better than business sector?”
Stephen Slivinski, senior economist at the Goldwater Institute agrees. “When government favors one business over another with a selective tax break, it means that more investment – all other things being equal – is likely to go to that favored business because they receive favorable tax treatment. But we have ample evidence that government policymakers are usually very poor at picking the right industries to favor. There are decades of empirical studies that show policies designed to generate economic growth through cherry-picking the next hot industry and then carving out special exemptions for them usually fail to achieve the stated goals.
“Tax breaks, if they are to be granted at all, should be of a general nature. They also shouldn’t be crafted for the purposes of encouraging businesses to invest in something they might not have otherwise. So, a tax cut that applies to all businesses would be a good policy while tax credits or special exemptions for certain companies wouldn’t be. The general tax breaks keep government out of the business of playing favorites in an economy,” said the Goldwater Institute economist. The Phoenix-based Goldwater Institute is an independent government watchdog committed to expanding free enterprise.
Seth Forman, Ph.D., Professor of Public Policy at Stony Brook University who specializes in regional economics, didn’t mince his words. “In short, government at any level should not pick winners and losers in the private sector. It represents crony capitalism at its worst. It favors the wealthiest and best-connected businesses at the expense of small businesses, the core of any successful metropolis. A successful city must be home to specialized industries, small businesses, schools, and neighborhoods capable of regenerating themselves for the next generation.”
Art Babbott, one of those on Flagstaff City Council that voted against the tax break, explained his stance: “From my perspective, the city’s incentives policy should be based more upon which sectors of the economy we are trying to support and expand, as opposed to individual businesses. I am not opposed to providing incentives to specific businesses within the sectors we are trying to grow.
“City government has an important role to play in facilitation and regional economic development cooperation. Flagstaff’s economy is dominated by retail and service sectors and if our goal is to strengthen our economic base through diversification, our economic incentive policy should be focused on industrial, research and development, emerging technologies, clean energy and business park development. A diverse economy is a strong economy and a strong economy is a more resilient economy.
“After a lot of deliberation, my vote came down to my belief that public revenues should not be used to help subsidize commercial and retail development in our community. This is the same reason I opposed the $11 million of public funds for the mall and autopark development. In contrast, I supported incentives for Purina precisely because they help provide economic diversification to our community. … There were good arguments for this proposal but at the end of the day, I did not feel the outcome of this proposal fit with the need to focus our economic development policy on business which diversifies our economy.”
While experts debate the right path, one thing is sure: we are sure to see municipalities trying many roads to recovery – traveling through level fields or not. FBN
