Study: Corporate Tax Breaks Don’t Always Help

Ashley Hemkin
Managing Editor of Fox & Hounds

A joint-sponsored study issued by the Reason Foundation and the Howard Jarvis Taxpayers Foundation declared that tax breaks for corporations work against economic growth in California. Those with the best connections in the political world benefit the most in acquiring breaks while the economy suffers, the study suggests. One prime example noted by the authors was the case of Solyndra, which cost federal taxpayers $528 million while also benefiting from a $25 million California state tax exemption.

The study claims to address the key question on any tax break: does such favorable treatment really result in a net gain to the economy and the state? The study said while some businesses benefited from certain tax policy, “negative effects of targeted tax breaks overshadow the positive effects.”

The study pointed out that while California has created many tax breaks to help the business environment, California is still considered one of the worse places to do business.

You can find the full study by Adam Summer and Ankur Chawla of the Reason Foundation here.

Following is the press release issued yesterday by the Reason Foundation and the Howard Jarvis Taxpayers Foundation.

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A new study released today by the Reason Foundation and the Howard Jarvis Taxpayers Foundation shows why many California tax breaks given to corporations constitute corporate welfare and demonstrates how they actually impede economic growth and contribute to the state’s poisonous political environment.

The study examined numerous corporate tax, sales and use tax credits, tax deductions and exemptions in order to evaluate whether California tax breaks serve their intended purpose. The argument offered in support of such tax breaks is usually that they will boost the economy by improving the livelihoods of certain classes of individuals, businesses or industries. But their true costs are frequently ignored. While tax credits may encourage business activity in certain sectors of the economy, the research shows that they limit business activity that would otherwise have taken place in other sectors of the economy by bestowing benefits upon politically favored industries and companies.

“The state’s maze of tax credits props up select groups, blocks competition and lacks accountability,” said Adrian Moore, vice president of policy at the Reason Foundation.  “This research shows special interests disproportionately benefit from these tax breaks at the expense of the overall economy and the rest of the state.”

The Reason Foundation-Howard Jarvis Taxpayers Foundation study reveals that while tax breaks may be intended to serve as an economic engine, they often become wasteful corporate handouts with the government attempting to pick winners and losers, often at a steep price tag to other businesses in the marketplace or ultimately, taxpayers. From farm machinery to motion pictures to computer programs to the timber industry, the study highlights how a long list of inefficient tax breaks fail to deliver the economic benefits promised to the state’s economy and taxpayers. Solyndra, the notorious California solar cell company that stuck federal taxpayers with over $500 million in debt, also received $25 million in California corporate tax breaks . The study shows why Solyndra is a textbook example of “government using – and losing – taxpayer dollars to play favorites and advance a political agenda by interfering in the market.”

“Our study reveals what we have long suspected,” said Jon Coupal, Chairman of the Howard Jarvis Taxpayers Foundation.  “Special interests in Sacramento get special favors in the form of tax loopholes, usually at the expense of citizen taxpayers, small businesses and working class Californians.  Many of these corporate rent seekers are the same ones who finance initiatives and support legislation imposing broad-based tax hikes on everyone as long as they get to preserve their special tax treatment.”

Coupal also said, “Let’s be clear.  This is not a call for higher taxes – just a smarter tax system which removes unjustified tax breaks and reduces the overall tax rates for everyone.  Doing this would also lessen the ‘pay to play’ atmosphere in the Capitol.”

Even with billions of dollars in tax breaks purportedly intended to encourage economic activity, California maintains one of the worst business climates in the nation. The study suggests one way to improve the state’s business climate would be to lower and simplify the state’s tax code by eliminating tax credits altogether. The Franchise Tax Board (FTB) estimates that the overall corporate tax rate could be reduced by 14 percent simply if the Research and Development Credit alone were eliminated. The study shows that if other tax breaks were eliminated, California could likely reduce its overall corporate tax rate by more than 20 percent.

For more information or a copy of the study, visit http://www.HJTA.org and click on “Hot Topics” or visit the Reason Foundation’s website at http://www.Reason.org.

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