California

The Examiner reports that "[t]housands of businesses on San Francisco’s east side will remain eligible for state tax breaks if The City wins approval from Sacramento in coming weeks." As the goal of these "Enterprise Zones" is to provide incentives to business to invest in economically depressed areas, there is a debate as to whether these incentives are appropriate in San Fran.

Jean Ross, executive director of the California Budget Project, suggests that “San Francisco stands out as an area that doesn’t need taxpayer dollars to further its economic development" and compares the Golden Gate City's situation to that southeastern California's Imperial Valley, where is a 30% unemployment rate.

Regardless of the merits (or lack thereof) of her argument that San Francisco businesses are undeserving of tax breaks, Ms. Ross falls into the classic trap of equating state tax breaks with giving away taxpayer dollars. Tax incentives either reduce the amount of taxable income in the form of a deduction or they reduce the total amount of tax liability in the form of a credit. But neither form gives money to businesses directly from the state treasury. Suggesting that tax breaks throw away taxpayer dollars incorrectly assumes that the amount of investment and income generated by a business is not influenced by tax regimes. Without a tax break, a business does not invest and hence does not generate any more taxable income or create any more jobs or offer any more products to the public. With a tax break, there will more investment, income, jobs (income tax), and products (sales tax), while the tax liability will, theoretically, remain the same. All in all, it seems fairly clear that the economy is better off when a business is able to lower its tax burden in one way or another.

That being said, we would all be much better off if state and local governments got out of the business of deciding who gets this tax break and who gets that tax break and instead concentrated on offering a simple and low tax rates for all businesses, large and small.