UN

I couldn't resist sharing this article from one of my favorite journals, the Khaleej Times. The best part is this remark from a senior UN official: "[Marijuana is] out of control in supply because it’s a weed; it grows everywhere."

With all the goods things happening in Sudan and elsewhere, it's good to know that the United Nations has its priorities straight.

Washington

Who wouldn't want to give farmers a tax break? After all, the farming community is the salt of the earth. If anyone deserves a break from state tax collectors, it's them.

Unfortunately, the task is not as easy as, for instance, simply giving farmers a break from taxes on replacement parts purchases. Today's Yakima-Herald Republic shows that the devil is in the details.

John Riel, owner of Burrows Tractor in Yakima, said farmers are chewing over the topic at the coffee shop.

"People know about it but they're confused about it so a lot of guys haven't done anything," Riel said. "They don't understand why parts for your tractor are exempt but not your four-wheeler that you pull apples through an orchard with."

According to Gowrylow, the law specifically excludes parts for four-wheelers and lawn mowers from the definitions of what is exempt.

"It is true that farmers use these for farming purposes, but they also can be used for recreational activities, and the Legislature chose to exclude them from the exemption," he said.
Hop farmers are confused about whether stationary picking machines are eligible, Riel said. And others don't understand why an oil filter is exempt but a grease tube is not.

JoAnne Gordon, tax policy specialty with the revenue department's legislative and policy division, asked for a little patience while the law gets up and running.

"We aren't farmers so we need folks to explain some of these things," Gordon said.
The department has determined that parts for hop kilns are eligible for the sales-tax exemption.

But oil, grease, paint and anti-freeze aren't because they are consumable, not parts, she said.
And really, the department is here to help, she said.

"The bottom line is that the Legislature is very concerned about farmers and their ability to keep farming and that's why they took a good long look at the issue this last session."

With all due respect, JoAnne, shouldn't the burden be on your office to explain the distinctions you made up? Your consumption reasoning makes little sense and if you really wanted to help farmers you would give them a break on the items that they purchase on a consistent basis: oil, grease, anti-freeze, etc.

My guess is that whoever is in power right now will take credit for helping the farming community when it is election time. The farmers will be up in arms because they will know few of them were able to take advantage of the tax breaks. This won't matter, however, as farmers do not make up a significant portion of the electorate. What matters is that it appears that you helped the farmers and that the majority of the voting public sees it as such.

Florida

Yesteday, an attorney I met mentioned the tax breaks and incentives that sports teams in Chicago receive, specifically referring to the stadium help that the Chicago White Sox received.

Then this morning I read an article on how the same sort of stuff is occurring with America's first professional baseball team, my favorite and your's, the Cincinnati Reds. From the Sarasota Herald Tribune:

Now that the state has committed $15 million to help keep the Cincinnati Reds spring training in Sarasota, the pressure is on local officials to come up with enough money to build the new stadium the team wants.

Gov. Jeb Bush signed a bill Tuesday that gives tax breaks for spring-training facilities in five cities, including Sarasota and Bradenton — worth $15 million over 30 years.

Sarasota officials said state funding was key to efforts to keep the Cincinnati Reds, while Bradenton will use the money to refurbish Manatee County facilities used by the Pittsburgh Pirates.

I can't say that I am all that surprised. Sports teams have been playing politics for years and the use of tax breaks in exchange for staying in a locale has happened with frequency in recent times. It's a shame other teams do not abide by the San Francisco Giants' stadium plan.

What is somewhat encouraging is that Governor Bush at least acknowledged the issue:

Earlier this year, Bush seemed poised to veto the effort, saying he opposes giving tax breaks to wealthy owners of professional sports franchises.

Just a week ago, Bush said he was undecided, saying “it depends on whether my libertarian gene has been activated or my economic development gene.”

Bush said Tuesday that he signed the bill after becoming aware that Arizona “folks are using the same tactics, using government money to lure teams.”

It's not as if you need government money for economic development, but, like I said, at least J. Bush is not completely blind to the issue.

fresh

In my last post I mentioned that I going to begin blogging on a bit of my actual life. Well here goes nothing . . .

During my first year of law school, I arrived one evening at a local Columbus bar around 10PM extremely hungry from having not eaten dinner. I'm not sure why I had not eaten yet, but there was probably a good reason and in any event I needed put to something in my stomach in order for the night to progress in a positive way.

Looking at the menu at the bar, there was not much to offer, but one item did catch my eye: the barbeque chicken pizza. I had always been a fan of pizza but for whatever reason had never gotten the chance to partake in this particular chance; I think I might have been scared that trying to mix the idea of pizza with barbeque sauce would somehow turn me off from pizza forever. That night, however, I decided to give bbq chicken pizza a shot, and there was no going back.

The taste was unbelievable: a perfect combination of chicken, cheese, crust, and barbque sauce. It was everything I could ask for and then some. After thouroughly enjoying my first bbq chicken pizza experience, I had a great night out with friends, which cemented the meal's legacy in my mind and stomach forever.

Since then, I have tried the barbeque chicken pizza at other places, though probably not enough. It actually turns out that my first bbq chicken pizza was the worst, relative to the rest of the below rankings. Yes, from here on out I choose to rank my barbeque chicken pizza preferences. You may not come across state tax breaks and incentives too often in your real life (actually you probably do but just don't know it), but there is no way you can avoid going to quality restaurants and seeing this superb item on the menu. And when you do see it, think of me.

Rankings

1) Spagio, Columbus, OH: almost perfect
2) California Pizza Kitchen, Anytown, U.S.A.: just tried it recently, pretty good, but it's missing something, though I don't know what it is; it is worth noting that CPK (a restaurant chain started by a couple of attorneys) claims to be the originator of the barbeque chicken pizza
3) Bluestone, Evanston, IL: this might actually top the list if it weren't for the extremely thin crust; this crust eventually become a nuisance to the meal
4) B. Hampton's: pretty good for bar food, but otherwise too much cheese

If you have any suggestions of places to try a bbq chicken pizza, please let me know.

California

Last week Evan Halper of the Los Angeles Times (registration required, sorry; you may be able to get to it via Google News) wrote a piece on the proposed California state budget. I hope to discuss the article at length in the near future, but for now I am just going to highlight one part of it. When reading this paragraph, think of the time and effort it takes to decide which group gets a tax break and out of that group which businesses do not get that break, not to mention how tax authorities are able to make sure that the deserving businesses actually get the break and those that don't deserve it do not wrongly get the break . . .

The California Teachers Assn. and liberal tax policy groups argue that it would lead to little more than cash handouts for productions that were never in danger of leaving the state. The state, they warn, could end up subsidizing pornography and other arguably offensive content despite efforts by the proposal's supporters to exempt such productions. And they say many film companies that would benefit from the program don't even pay taxes in California, thanks to complex Hollywood accounting procedures that allow them to shift profits to states with lower tax rates.

Side note #1: I finally was able to publish this post after a few tries. It is frustrating to accidentally lose a post that you spent nearly a half-hour on. This is the first time this has happened to me and it is the reason why I will have to save all my thoughts on the linked L.A. Times article until another time.

Side note #2: While blogging on state tax breaks and incentives has been an incredible and exciting experience thus far, I have decided that this blog needs a touch of my personal life. Stay tuned.

reason

It's good to know that Reason is covering the filming credits saga.

Memphis

The Smart City Memphis blog recently posted a Forbes article on Memphis' Payment-in-Lieu-of-Tax (Pilot) program and the issues that come with it.

Philadelphia

I love Philadelphia. The City of Brotherly Love has an indescribable vibe that I have yet to find elsewhere. Tax-wise, however, the vibe is not there. From MSNBC (via Philadelphia Business Journal):

Philadelphia's tax burden also played a large role in AAA Mid-Atlantic's decision to relocate its headquarters to Wilmington and its information technology operations to Mount Laurel, N.J., despite being offered tax incentives to stay, spokeswoman Catherine Rossi said.

"While the tax incentives was a strong consideration, AAA looked at a number of other factors that swayed the decision to move from Philadelphia to Delaware," Rossi said.

In Wilmington, AAA Mid-Atlantic no longer pays a business privilege tax and its city wage tax has dropped from the roughly 4 percent workers paid in Philadelphia to 1.25 percent, she said.

In addition, its corporate net income tax has dropped from 9.99 percent, paid in Pennsylvania, to 8.7 percent in Delaware. Also AAA Mid-Atlantic no longer faces Pennsylvania's 6 percent sales tax and the additional 1 percent for taxable items bought in Philadelphia.

Wilmington also has no corporate stock franchise tax, which was paid at a rate of 0.00699 percent on assessed value in Pennsylvania, although a 1.92 percent tax on lease-related items is imposed in Wilmington, Rossi said.

If you read the entire article, you will come across all sorts of taxes that are thrown at Philadelphia businesses: corporate stock franchise taxes, wage taxes, a business privilege tax (is this saying "We're doing to tax you for the privilege of doing business in Philadelphia"?), an alternative tax on capital, to name a few. It's a very confusing area. It would be naive to think that a one-time incentive would serve as a gateway to investment.

Iowa

Looks like officials in Iowa got burned while playing the tax incentive game. Check out this long-run sentence in response to Rubbermaid's "refusal" to take a tax break:

Tina Hoffman from [the Iowa Department of Economic Development], says Rubbermaid refused to respond. "Well, it's frustrating to have the tools available to know that we have the workforce in place that's trained and very productive and frustrating to not have the opportunity to really convey the advantages."

New Mexico

When states operate their tax scheme via a flat rate, it is a fairly simple process whereby you set the rate and go on to other matters. But when you get into tax incentives, things can get tricky, as today's Farmington Daily Times illustrates.

In New Mexico, lawmakers wanted to attract investment to "rural" areas. But New Mexico deputy secretary for economic development Kelly O'Donnell noted that

one difficulty for the state is in defining a "rural area." There are three major programs that provide specific incentives for rural areas, and all have a different definition for what qualifies as rural, O'Donnell said. A community like Farmington will qualify for some programs, but not for others, she said.

As the article discusses, only you get through the thorny statutory interpretation issues, evaluating whether the incentives work as originally intended is a whole other can of worms.

John Travolta, Shirley MacClaine, Lindsey Lohan, Jessica Simpson: which one are you kicking out of your hot tub?

As a follow up to a few readers' comments to my 6/6/06 post, it looks like filming will begin soon in Shreveport on a movie version of the television classic, "Dallas"! All thanks in part to tax incentives!

Wait, actually, hold on, we're still waiting on confirmation . . .

If this does actually go through, I'm sure it will be difficult to find much negative coverage of these developments, especially considering what has occurred in Louisiana within the past year.

I will remain skeptical, however. Why are only filmmakers entitled to good tax rates? Are these breaks going to better Louisianans as a whole or just an entitled few? Would the producers not have come to LA without the incentives? Would they have already been in place had there been a better tax regime in the first place? Most importantly, is "Dallas" even going to be a decent movie? After all, we know there is know way Johhny T. can live up to the TV version of J.R. Ewing.

2004 book review

Today I came across a 2004 Oregon Center for Public Policy review of a book entitled Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development. The book was written by economist Robert Lynch of the Economic Policy Institute and the review came under the caption of "New Book on Economic Development: 'State Tax Breaks Don't Create Jobs.'"

The folks at OCPP and EPI are like me in that they do not particularly like state tax breaks. But for the most part our reasons for disliking tax breaks are different. I see tax incentives as an inefficient, second best way to attract investment in terms of tax policy. Organizations like OCPP and EPI do not like tax incentives because they "undermine government's ability to provide public services." They never seem to address the suggestion that perhaps the private market is a better provider of these types of services than the government. But I digress.

Jeff Thompson, the economist who wrote the book review for OCPP, does make a halfway decent point, however when he says "business tax cuts are about the least efficient means of job creation conceivable." While socialism and higher taxes are far less efficient, it's good that he questions the link between tax cuts and job creation. Contrary to popular wisdom, politicians, whether they are the U.S. President or the local state representative, do not create jobs through their policy measures, whether the measure is a tax cut or increased spending. Job creation is a reflection of supply and demand and the decision of an investor to offer a job to another. One factor in this decision may be the tax ramifications.

This relates to one of the underlying premises of my blog: when one has to worry about the tax ramifications of his or her investment, things need to be changed.

Mississippi

It's a safe bet to say that many Americans see tax incentives as a way to directly encourage business investment. But in fact, this is not actually what happens. Rather, as an article in today's Clarion-Ledger shows, businesses usually make an investment decision and whatever comes to them in the form of incentives is pure "gravy."

I would also bet a few dollars that this sort of thing happened recently at Honda. Honda has been doing well over the past few years and likely wanted to re-invest some of the revenue it had generated. But rather than immediately putting the money to work, the execs realized that they could convince state lawmakers to compete against each other in the form of incentices, which would in turn lower their investment cost.

At this point, you may not like the CEO of Honda, but I say don't hate the player, hate the game.

Minnesota

In an article released today by a Minnesota business journal disussing biotech incentives, University of Minnesota professor Ann Markusen notes that “Tax incentives have been used for a long time, but they have exploded in recent years because states and localities feel like they’re in competition.”

Professor Markusen makes two valid points. First, tax incentives have been used for a long time. Second, states are currently in competition with each other.

But she is wrong to imply that this competition between the states is only a recent phenomenon. States have been going at with each other since our country's founding. Further, this competition does not solely occur in the purely economic arena, but also in social policy as well. As Justice Louis Brandies once remarked, "It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country."

Unfortunately, instead of competing by offering a comprehensive tax policy that encourages widespread investment, states compete with each on an ad hoc basis through tax incentives. My contention is that there is a lot of time and money wasted in this effort.

fantasy

You might have heard over the past year how the film industry is hurting. Piracy and lower audience turnout cut into the bottom line. Not to mention that movies, in general, suck nowadays.

But those guys in Hollywood are creative and they know how to strike up a deal. An AP report in the St. Paul Pioneer Press tells of executives achieving tax credits and incentives in, of all places, Wisconsin. According to the SPPP article, companies that spend $10 million in Wisconsin to produce a film there will get $2.5 million back from the state.

That is hilarious in of itself, but then read what Wisconsin governor Jim Doyle said at the tax break announcement: "We all believe we have the perfect state in the world to make movies in, but this is a way to provide tax incentives to people to do it." Well, if you had the perfect state to make movies in, you wouldn't need the tax incentives, would you?

Further, tax incentives alone are not enough to attract guys like my boy, Jerry Bruckheimer (producer of Top Gun and Days of Thunder), to the land of cheese. You're also going to need things like adequate production facilities, a diverse landscape (often), and people to act in the movies. And unless you're making a movie like Fargo, making a movie where the majority of speech comes from people with upper-midwest accents may not be the best idea.

Sure, the movie producers will probably just use Wisconsin natives as sides anyways. But I seriously doubt that Wisconsin is going to become anything more than a mecca for Lifetime Original series productions.

Puerto Rico Suave

Last week's Economist highlighted struggling Puerto Rico and the problems that came with tax incentives. True, Puerto Rico is not a state, but it's close enough.

Through tax laws, the federal government has . . . favoured some business investments in Puerto Rico over others. Most notorious is "Section 936," a rule that skewed investment towards technologies that were too advanced for Puerto Rico's stage of development. Drug firms and chemical producers built factories that used lots of capital and few workers, because doing so lowered their tax bills . . .

High technology sounds wonderful. But what Puerto Rico has needed over the past few decades is more medium-tech plants. These would employ more people, teach them skills better suited to the island's level of development, and tighten links to local suppliers and business services . . .

In short, by lowering demand for less educated workers, lopsided investment has exacerbated the welfare-driven distortions in the island's labour supply.

As the last sentence alludes to, the title of the article is "Trouble on Welfare Island." It goes on to note that the Section 936 rules have been phased out over the past decade.

Most of my thoughts up to this point have focused on the lack of fairness of tax incentives. The above excerpt illustrates that these incentives are not only unfair but can be harmful in the long run.

exposure

I will eventually begin to look at specific exemptions and more substantive issues of tax breaks, but for now I would like to finish laying the foundation of this blog. That is to say that I want to convey to everyone why I started A Taxing Issue. I think that I have done a fairly decent job so far at describing how I think state tax breaks and incentives are inefficient and unfair to smaller businesses. But while I have noted that the Wall Street Journal and The Economist missed golden opportunities to criticize state governments, I need to make it more clear a key reason why I am covering this issue at all: no one talks about it!

When I say no one talks about it, I think of the lack of interest of everyday citizens, the media, as well as think-tanks and the like. But I really don't understand why two groups, in particular, don't make more of an issue out of state tax breaks and incentives. Those would be elected officials (incumbent and those wishing to join the party) and smaller businesses.

If you wanted to be elected or re-elected, wouldn't you expect significant support for a corporate tax policy that is low and uniform across the board? Industry would like it, those who believe in limited government would like it, and citizens should like it because it will attract investment from within and outside of a state. I say should because there will probably be some cry-babies who feel they are better off under a high tax regime who are able to convince an otherwise naive public that a low and uniform business tax is a bad thing. But much of the public has an irrational fear of large corporations anyways, so I would suspect one could partially confront the problem of naysayers by saying something (with historical support) to the effect that those who support a higher tax regime and/or are against a low business tax plan are more likely to grant favors to corporate America in the form of tax breaks. In short, I think there is plenty of support for a low corporate tax and plenty of opportunity to counter the haters.

As for smaller businesses, their motivation to rally against state tax breaks and incentives should be obvious. They are getting played by the current political system.

I may be wrong and there may be organizations and politicians out there who are rallying the troops for the fight against state tax breaks and incentives. If so, please let me know. For now, the saga continues . . .

whose fault is it?

Corporate America's ability to attain tax breaks and incentives compared to the inability of smaller businesses to achieve the same rates is a sad reality. But should we really blame the larger companies for trying? Just like everyone else, they are trying to maximize profits and please their shareholders. If there is a good investment possibility in the form of tempting legislators to grant tax breaks, only short-sighted management would fail to take advantage of this opportunity.

The blames needs to be placed on state legislators who create the conditions that enable influence and lead to inefficient tax breaks and incentives. They control the tax rates and should be held accountable for favoring corporations in the tax arena. Besides the fact that these tax breaks and incentives are inherently unfair to smaller businesses, can we really be certain that state governments make the right decision regarding to whom should the incentives be given? The free market is the best way to determine who should stay in business and who should not; when state lawmakers have the power to grant tax breaks and act on this power, they distort the market and lead us to an inefficient mix of larger companies who are financially stronger due to the tax breaks and smaller businesses who must compete against a state-imposed tax dichotomy.