Wednesday, April 27, 2011

Goldwater Institute: The pitfall of “do-something” tax policy

The mantra of Arizona legislators this session was “jobs, jobs, jobs” — certainly an important emphasis for any policymaker. But the desire to appear to be doing something, anything, to spur job growth sometimes sucked them into legislation that will be counterproductive to long-term economic growth.
Take Senate Bill 1041, for example, which would significantly lower property taxes for new businesses locating to or being created in Arizona, provided the companies invest a certain amount of money in their operation and hire a minimum number of employees. The bill passed both the House and Senate handily by the votes of virtually all Republican legislators and awaits the governor’s signature. The bill, however, is more than unfair to businesses that have been operating in Arizona awhile and have already hired employees and made their investments.
Some of the bill’s support was motivated by a genuine belief that carving out special benefits is a sustainable economic development strategy. But other legislators fell prey to the “do-something” impulse, explaining as the bill’s primary sponsor, Rep. Michele Reagan, did in the Arizona Republic that the bill will make Arizona more competitive while we wait for other business tax cuts to start in 2013.
Regardless of legislators’ sense of urgency or earnestness, the “do-something” bill they supported is bad policy. First, preferential tax treatment for new businesses sticks existing businesses with a higher tax burden that effectively subsidizes their competitors.
Second, SB 1041’s tax breaks will be difficult to undo; the businesses that take advantage of them aren’t likely to give them up easily when the legislation sunsets in 2017. The businesses that happen to re-locate to Arizona and claim they did so to take advantage of the tax favoritism – whether that was true or not – can hold state tax policy hostage in the future by threatening to pick up and leave if the favorable tax treatment isn’t renewed.
Bad policies enacted as a temporary fix have a way of sticking around. And legislation full of special favors like SB 1041 makes it more difficult to pass the fundamental tax reforms that can truly make Arizona more competitive in the long run.
Stephen Slivinski is senior economist with the Goldwater Institute.
Learn More:
Goldwater Institute: Politicians go on “jobs poaching expeditions
Goldwater Institute: Government attempts to second-guess the market are bad policy
National Federation of Independent Business: NFIB Opposes SB 1041 as Bad Tax Policy, Likely to Be Struck Down as Unconstitutional

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