Special tax carve-outs to companies and individuals cost states across the country hundreds of billions of dollars last year, according to a new report by the American Legislative Exchange Council (ALEC).
In a report released Thursday titled The Costs of Cronyism: Favoritism and Foregone Growth, authors William Freedland, Ben Wilterdink, and Jonathan Williams attempted to calculate the cost of special tax exemptions and incentives offered by states.
Overall, the authors found that tax carve-outs in all 50 states last year totaled $228 billion for personal income and businesses earnings tax exemptions, and $260.1 billion in sales tax exemptions.
These provisions are called "tax incentives" or "tax expenditures," but the report argues they are really a form of cronyism—advantages doled out to favored companies and individuals that shrink the tax base and raise costs on everyone else.
The report authors say so-called tax cronyism "stifles competitive tax policy by precipitating tax rate increases on the firms not in favor with policymakers, subverts market outcomes for inferior economic planning, and introduces a deep temptation for public corruptions."
One example of such tax cronyism are the special tax credits given to movie and television series producers. Maryland awarded the hit Netflix series House of Cards $11 million in tax carve-outs to film the show in the state. After threatening to relocate to another state, House of Cards struck a deal with Democratic Gov. Martin O’Malley for another $11.5 million in tax incentives.
The report notes that Illinois and Oregon are both trying to keep large companies, such as Intel and Sears, from fleeing their states by offering millions in tax credits "at a time when general corporate tax rates have gone up dramatically and Oregon and Illinois are dangerously underfunding their pension systems."
The report’s authors, while critical of government intervention in general, argue there is a difference between tax credits that aim to assist low-income individuals, such as the earned income tax credit and child tax credit, and tax carve-outs that are only available to those with sufficient political capital.
"The types of business and industries that have the political clout, connections, and lobbying resources to secure these preferential tax deals are generally very large firms," the report says. "Meanwhile, individuals and smaller businesses—those not favored by policy makers—cannot afford such generous deals."
In a conference call with reporters, Freedland said the report is likely low-balling the amount carve-outs, which are "probably substantially bigger than reported. Lack of transparency is a huge issue. There needs to be much better reporting."
For example, Alabama, Alaska, Nevada, South Dakota, and Wyoming do not report the value of their tax carve-outs. Other states only publish "infrequent or incomplete" data. California only reports tax expenditures valued at greater than $5 million.