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Yielding To Special Interest Creates Poor Tax Policy

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By Lowell L. Kalapa
(Released on 12/23/07)

In recent years, special interests within the business community have become accustomed to looking to government to bail them out of difficult times for their particular segment of the economy. Those special interests have come to expect handouts from government just as much as those on the welfare rolls have come to expect that handout of assistance.

These handouts have come largely in the form of tax credits in recent years because lawmakers believe that these targeted business tax credits will encourage a certain type of industry or behavior. Many of these special interests have gone to the trough so many times that others figure that they can feed at the slop so they too line up for a handout. Unfortunately, just like welfare assistance, these handouts must be paid by all other taxpayers who are not standing in the handout line.

This strategy ends up shifting the tax burden from these favored few to all others, forcing lawmakers to keep the tax burden unnecessarily heavy on the remaining taxpayers because they are unwilling to make reductions in spending for the lost revenues created by the tax credits. But the beneficiaries of this tax give away argue that these tax credits help to create new industries and new jobs and therefore more tax revenues for the state. Whether or not that is true has yet to be proven as there is no way of tracking this information without strict reporting requirements which, until this year, the legislature has only begun to entertain for the high technology tax credits.

And because lawmakers cannot determine how many taxpayers will take advantage of these tax credits because once they are put on the books they are there for any and all to feed on the largesse, and lawmakers argue that they cannot lower other taxes because they just might need the money to keep the state running. Again, this means that those not so favored keep on paying that heavy burden of taxes.

So while some of these favored taxpayers may create new economic activity and perhaps new jobs, old-time businesses find it more and more difficult to stay in business because of not only rising taxes, but higher  fuel costs, higher occupancy rates, and more stringent labor laws. Stuck between higher costs and a competitive marketplace that makes it difficult to raise prices accordingly, these not-so-favored taxpayers make the difficult decision to close up shop and go out of business. How many old time okazu stands that have gone out of business in the past year have you lamented or that favorite corner grocery store that was so convenient or your favorite barbershop or beauty salon that has shuttered its windows?

The point of the matter is that when lawmakers create an uneven playing field, those not so favored end up shouldering the remaining burden. In that sense, there is a dark cloud hanging over the economy as a whole as potential investors look over the landscape and conclude that unless there is a tax credit to offset the heavy burden of taxes, it is a losing proposition to invest any funds in industries other than those favored by the tax credits.

Thus, tax credits to attract venture capital for high technology enterprises mean that there is a greater possibility that venture capital will not find other types of industry as attractive and therefore those industries lose the potential to attract the needed capital to start their enterprises. Thus, tax shifting represents poor tax policy because it creates the illusion that taxes are being cut or that government is “investing” in the economic future of the community. Instead, tax shifting merely is hastening the demise of those businesses who cannot continue to cope with higher and higher taxes because lawmakers refuse to reduce that burden to offset the effects of inflation and the increasing cost of doing business. And the burden is shifted not only to businesses who then must try to pass the cost on to their customers, like you and me, but it also affects the income of wage earners and retirees who don’t see any relief in their paychecks or on their investments which supplement the retirement income of seniors.

What is ironic is those who ardently support these tax credits come from the same party where, on the national level, their counterparts call tax cuts for businesses enacted by the current administration “corporate welfare.” What do local lawmakers think these targeted tax credits are? Are they helping the poor and downtrodden that they so zealously champion?

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