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February 2017
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New Report Shows Oregon’s Economy Is Struggling Due To Cronyism

Flags-of-usa-and-oregon
The flags of the United States of America and ...

The flags of the United States of America and the State of Oregon, flying side-by-side in Portland, Oregon (Photo credit: Wikipedia)

A new report released today shows that Oregon ranks near the top of all states in special tax breaks, loopholes and corporate cronyism. The report shows that, by choosing winners and losers in the economy and attempting to shape the economy through central planning, Oregon’s economy is falling behind other states that are much more competitive. Oregon struggles to attract new industries, broaden its tax revenue base and create jobs. Contrary to what Salem tells us, Oregon’s economy is struggling due to cronyism.

The report, The State Factor, examines “the unseen costs of tax cronyism: favoritism and foregone growth”. In a conference call July 24th, the authors, William Freeland, Ben Wilterdink and Jonathan Williams of the American Legislative Exchange Council discussed the process of completing the report and several real world examples of the deleterious effects of what they called the growth through central planning approach.

It should come as little surprise that Oregon ranks near the bottom in future prospects for economic growth, and near the top in crony tax deals doled out to corporations.

Legislators who defend this system of favoritism often make disingenuous arguments to the voters. Jonathan Franklin said, “Many legislators talk out of both sides of their mouths – on the one hand, they’ll tell us that tax burdens don’t matter to corporations, and then will turn around and give out special tax breaks to create jobs.”

The report describes the idea and effects of cronyism:

Cronyism—the perversion of sound economic policy to create a system that benefits one firm or industry at the expense of all others—is a serious public policy problem. Cronyism in tax policy is no exception. It 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.

In the most recent year in which each state published their respective tax expenditure reports, the sum of tax carve-outs was as follows: $228 billion for personal income and businesses earnings tax exemptions and $260.1 billion in sales tax exemptions. This figure largely ignores targeted tax breaks by states to individual businesses, which The New York Times reports total 157,072 specific grants to firms over the past two
decades.

Figure3: TheNewYorkTimes Analysis of Targeted Business Incentives

States

#of Grants to Companies

Alabama

1,732

Alaska

50

Arizona

2,430

Arkansas

489

California

2,696

Colorado

324

Connecticut

293

Delaware

681

D.C.

44

Florida

1,804

Georgia

261

Hawaii

416

Idaho

253

Illinois

1,941

Indiana

1,339

Iowa

2,132

Kansas

808

Kentucky

3,196

Louisiana

2,930

Maine

4,840

Maryland

260

Massachusetts

1,479

Michigan

11,747

Minnisota

1,032

Mississippi

1,202

Missouri

2,552

Montana

60

Nebraska

590

Nevada

457

New Hampshire

400

New Jersey

7,335

NewMexico

183

New York

52,132

NorthCarolina

1,760

NorthDakota

619

Ohio

3,321

Oklahoma

6,933

Oregon

10,027

Pennsylvania

5,506

Rhode Island

597

South Carolina

255

South Dakota

195

Tennessee

143

Texas

2,649

Utah

3,504

Vermont

601

Virginia

1,126

Washington

10,528

West Virginia

308

Wisconsin

903

Wyoming

9

Source: The New York Times

From this list, you can see that Oregon far outpaces other states of similar or lower population. Indeed, Oregon ranks #4 overall in number of special tax handouts, despite having the 27th highest population. The authors noted that no coincidence that Oregon ranks so high in the cronyism report, and so low in the Rich States, Poor States report of earlier this year (#42 in overal economic outlook). Indeed, they noted that Oregon’s figures really jumped out at them as a serious outlier.

The authors favor a tax system that is more broad based and fair, and allows for free market innovation. Too often, they say, the centrally planned economy favors large corporations and shuts doors for new companies and industries. They articulate a taxation principle that would allow for maximum market innovation and minimal governmental intrusion:

The purpose of the tax system is to raise needed revenue for core functions of government, not control the lives of citizens or micromanage the economy. The tax system should exert minimal impact on the spending and decisions of individuals and businesses. An effective tax system should be broad-based, utilize a low overall tax rate with few loopholes and avoid multiple layers of taxation through tax pyramiding.

The end result of all this is not what the politicians intend. The report makes the bold claim that these tax carveouts do not work and actually stunt the growth of the state economy instead of stimulating it:

Tax carve-outs distort the market, violate the principles of sound tax policy, destroy the level playing field for firms in the market and open the door to ever-increasing rent-seeking. Still, could some consider this tradeoff worth the cost? Except for a few anecdotes, the data overwhelmingly show that despite these high economic costs, packing the tax code with specialized tax carve-outs for businesses and industries does not even achieve the goals of economic growth and job creation.

When a state endeavors to lure a company into its borders using targeted tax carve-outs, the results can vary. Many times, the company would have located in that state even in the absence of state-offered tax carve-outs. But sometimes companies shop around for a good deal and are ready to relocate at a moment’s notice for a better one. If this were the case, the state is in a bind. Should it expand the tax carve-outs it already gave the firm or simply let it go? Too often, states choose to expand tax carve-outs under pressure from firms that will always be
asking for more.

The report specifically highlights Oregon as a case study in its attempt to keep Intel in the state. Much like its previous deal with Nike (and perhaps as a result of this deal), Oregon is being pressured to make concessions:

The latest examples of states put in a tough spot by companies demanding higher tax carve-outs just to stay in the state are Oregon and Illinois. Oregon is in talks to keep Intel in the state, offering millions of dollars in extra tax carve-outs.26 Illinois passed tax carve-out deals with CME Group Inc. and Sears Holdings Corporation to keep them in the state at a cost of $218 million per year, at a time when general corporate tax rates have gone up dramatically and Oregon and Illinois are dangerously underfunding their pension systems.

The report also gives positive examples of what successful states are doing. Our neighbor to the north is one example:

Washington state is one success story in attempting to reverse the troubling trend of tax carve-outs. In 2013, thanks largely to the efforts of the Washington Policy Center, the state of Washington approved a law that added desperately needed clarification to the state’s tax carve-outs. Specifically, whenever a new tax carve-out is proposed, the legislature must include the reason for the deviation from the tax base and (in some cases) set specific benchmarks so policymakers can review the tax carve-out and evaluate whether it is successful and should continue. Transparency is key. Many people, including policymakers, are not aware of all the various tax carve-outs that hide in their tax codes, let alone what those proposals were intended to achieve. By requiring benchmarks for success and timelines for new tax carve-outs, legislatures can at least identify which carve-outs are achieving their goals and which are not. This information alone is lacking in many states today.

This is the type of non-partisan policy that should be adopted by Oregon so that everyone can keep track of who’s getting what deal. Another positive step to increase transparency would be to adopt the Michigan model of accounting for these carveouts in the budget:

One important step states can take to address tax carve-outs, particularly those that involve targeted preferences to just one firm, is to put these programs “on budget.” That is, make them cash payments done through the standard state appropriation process, not elements of the tax code or off-budget tax abatement.

The evidence is clear. Oregon’s economy is suffering from too much central planning and not enough transparency in corporate sweetheart tax deals. We would immediately make Oregon’s economy much more competitive if we adopted a more broad based, less intrusionary tax code that didn’t attempt to pick winners and losers.

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