Reframing the debate over industry incentives

The intensifying debate over the appropriate level of incentives our state should offer to lure new industry is the latest in a series of issues that can be resolved only through comprehensive tax reform.
The state Legislature’s job-creation efforts this session have focused on reducing the amount of corporate income tax that new or expanding industries must pay.
Alabama income taxes go almost exclusively to the Education Trust Fund, so the measures have resulted in familiar battle lines. On one side is the Alabama Education Association; on the other is the GOP.
Republican lawmakers say that the proposed income-tax reductions do not represent a loss in funding. If the company does not locate or expand in the state, they argue, the Education Trust Fund will not see the revenue anyway.
The AEA argues just as loudly that any waiver of income taxes reduces school funding.
False reasoning
In truth, we never know the significance of tax incentives in a company’s decision-making process. We are forced to rely on its self-interested proclamation that, unless it receives the maximum possible incentive, it will locate elsewhere.
The most recent local example involves Carpenter Technology. The state and local governments offered about $98 million in incentives to attract the firm. About $70 million of that reflects anticipated corporate income-tax credits, money that otherwise would go to the Education Trust Fund.
If we could somehow read the minds of Carpenter decision-makers, we might discover that the incentives were critical. Maybe their evaluation of a site in Tennessee and the one in Limestone County resulted in a draw, but Alabama’s generous incentive package tipped the balance.
In this scenario, we were unquestionably wise to offer the incentives. The Education Trust Fund would not have received a penny from Carpenter if it located in Tennessee. While the education fund will not receive income tax from Carpenter for the next 20 years, it will benefit from sales and income taxes paid by Carpenter employees.
Our mind-reading experiment could, however, produce a different result. We might discover that Carpenter was dead-set on Limestone County. The combination of access to a navigable river, proximity to its customers, inexpensive land and a skilled workforce convinced it that this was the place to be.
In the latter scenario, the $70 million income-tax credit represented an actual loss to the Education Trust Fund.
We have no way of performing a cost-benefit analysis of the incentives we offer, because we have no way of knowing the significance of the incentives to the company’s decision.
Lawmakers are wise to err on the side of attracting industry. The transformative impact of a large employer on a community ripples far beyond the taxes it pays. Neighboring states are aggressive in their efforts to increase available incentives, and we would be foolish not to keep up. Large employers benefit the state, even if we occasionally pay more to them than was necessary.
Impact on poorest schools
The wisdom of competing in the nationwide incentive wars probably would stir little debate but for our bizarre and regressive tax system.
The Education Trust Fund does not just pay the salaries of state bureaucrats. It is the budgetary vehicle for making sure that students in the poorest school systems still maintain some minimal level of education. School systems that enjoy high property-tax revenue pay more into the fund than they get out. School systems with low property-tax revenue get back more than they pay in.
One might assume that a school system in which most of the land is owned by mega-corporations with vast wealth would be flooded with property-tax revenue. One would be wrong.
The state constitution secures for timber companies and corporate farming operations the lowest property-tax rates in the nation. The result is that Black Belt schools are starved for revenue. Not only are the tax rates on timber and agricultural land low, they are based on the land’s value as agricultural land rather than its market value.
That made sense when the beneficiaries were families trying to hang on to small farms. It does not make sense — except for contribution-hungry politicians — when the beneficiaries are massive real estate investment trusts.
The Education Trust Fund — funded in significant part by corporate income tax — helps to correct the imbalance by shifting funds from suburban school districts that thrive on the comparatively high tax rates on residential property to those districts strangled by the low tax rates on land used for timber and agriculture.
The perverse result is that increases in income-tax credits for industries locating in prosperous counties tend to decrease funding for the state’s poorest school systems. Offering an incentive to a North Alabama industry hurts Black Belt schools.
Alabama must offer incentives that permit it to compete effectively with other states.
We also, however, must improve the opportunities available to children in the poorest regions of the state.
The debate that should consume us is not whether we should offer competitive incentives, but why we tolerate a tax system in which incentives offered to an industry in a wealthy part of the state must be paid for by taking educational funding from the poorest parts of the state.
Like many of the state’s problems, the tension over incentives would disappear if the Legislature would pass and the people would approve a workable tax system. The one we have is broken.
Contact Eric Fleischauer at http://www.mile304.com or eric@decaturdaily.com.

http://www.decaturdaily.com/stories/On-tax-reform-and-incentives,91792

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Filed under Alabama politics, Subsidies, Tax reform, unemployment

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