Missouri businesses are misallocating ‘political capital’

Nearly every politician these days is touting how he will “create jobs” with his wonderful programs and leadership. Often, opposing candidates in a race will each have their own “job creation” ideas; advertising those, while bad-mouthing their opponent’s ideas on the subject – even if their ideas are pretty similar in the first place.

HOW TO CREATE JOBS

As I see it, there are three ways government can facilitative job creation:

·   Direct cash subsidies – write a check directly to a certain business or businesses in a certain industry, or those involved in activities that meet certain criteria. Our friends on the left tend to describe this as “corporate welfare,” except when it’s their cronies getting the cash: Green Jobs, etc. 

·   Business tax credits – these are effectively back-door subsidies, whereby instead of cutting a check, the treasury will get less tax payments from businesses that meet the tax credit criteria. There have been popular tax credits for: historic preservation, low-income housing developments, government-backed bond issuance, and the like. More modern versions include various programs to discount the property or other local/state taxes for the increased value due to the expansion of certain businesses; or “jobs created” during certain periods.

·   Low Taxes and Regulations for everyone – Have a tax code that is as even across all board as possible, with few if any carve-outs for certain businesses or economic activities. Coupled with relatively low (or at least stable, and known) business regulations this makes sense to the average person. 

The first and second methods (direct subsidies and tax credits) are similar, in that government officials work to direct the economy to some degree by pushing or pulling business activity one way or the other. This is a mild version of central economic planning, whereby the economic playing field is tilted in a number of different ways, sometimes in a conflicting manner. It is difficult, even for the wisest and most well-intentioned planners, to sit on these boards and estimate which industries and firms should be advanced; and therefore which of the remaining firms and industries will necessarily be at a disadvantage. This could be because they are already thriving on their own, and so don’t seem to need “help;” or people just don’t like them as much, or hope they succeed as much, or don’t understand their value to actual existing or future customers. Either way, market economics are held in at least some distrust.

Though not a binary process that results in total success or failure, this process picks winners and losers.  One can imagine the potential for misallocation of incentives, misestimation of macro-economic trends, and or rent seeking as firms and industry representatives cozy up to the decision-making planners and directors. Sure, one can imagine that crooks and cronies would seek to capture the process (as they so often do in reality); but what also happens is those who do not seek favor risk being overlooked, having their competitors chosen instead, or rules written in a way that handicaps their industry. Not taking the time away from actually running one’s business operation to have a seat at the planning table has increased risk these days.

WHAT’S A BUSINESSPERSON TO DO?

I have been harsh in the past in my philosophical opposition to tax credts,   but I admit I have since mellowed my tone, and taken a more diplomatic stance in deference to the many respected members of my own community who have committed their political careers and business reputations to business incentive advocacy.

Going back, say, 50 years, I have the impression that businesses largely wanted reasonable taxes and regulations, and to otherwise have the government leave them be to serve customers. So assuming there was relatively free enterprise for most back then, what changed? I wonder at what point the business communities in America trended toward this?

One change any businessperson will tell you is increased government regulation, particularly from Washington; but also at the state and local levels. Many bureaucracies, czars, congressmen, and presidential administrations over the years have taken it upon themselves to keep us safe from bad products and services, corporate greed, profiteering, predatory lenders, lead paint, and cars without proper seat belts. Their rate of success to make citizen’s lives better has been a mixed bag, but it is certain that individuals have less say over their own lives now than decades ago. And businesses have much greater legal and regulatory compliance responsibilities, and have to know current law related to their line of business.

Local magistrates and planning and zoning boards, etc. have also increased restrictions on things like: building codes, tweaks to labor law, billboard-sign bans, health inspections, and requiring a permit before adding onto your backyard deck.

But the onward vigilance of smart growth advocates, environmental activists, community organizers, and such have been quite successful in directing local policies to make it more costly and difficult to build new housing, or fire a legitimately unsuitable employee, or even make a minor change to your existing parking lot if it happens to be a protected watershed.

Many large firms have engaged in government capture for a long time, and many small towns indulge in crony deals from government contracts and selective law enforcement. But perhaps the good old-fashioned local businessperson who seeks to make a living through legitimate commerce has been left behind by the march toward collectivism of the economy at large. So perhaps business interests have found themselves in recent years so restricted in exercising their legitimate property rights and inhibited in their right to engage in free enterprise and to earn a living, that they have become resigned to living with these often unrealistic (and possibly unconstitutional) laws.

ARE TAX CREDITS SOMETIMES BASED ON GOOD INTENTIONS?

But businesspeople tend to be an innovative lot, and so in an era of government restrictions and higher taxes, it seems more and more business interests have sought to reduce taxes for at least some business activities that they can convince the collective are politically beneficial.

For instance, many people wish the poor and homeless could be provided housing, so let’s give tax discounts to developers of low-income housing units. Or many like to see historic buildings in their community restored, or at least not torn down, so let’s offer historic preservation tax credits. Or wouldn’t it be good if we could increase the goods China buys from our state, so let’s establish a tax credit system for new warehouses to be built for this purpose around the St. Louis airport.

Even local business groups around Missouri are promoting Tax Increment Financing (TIF) programs to allow business expansion or new construction projects to use some of their taxes to reinvest in their project. So if one’s project is deemed beneficial to the community at large, he is allowed to have some of the local taxes otherwise owed on the increase in property value instead go back into the project over a certain number of years. TIFs are created for very specific industries in very specific geographic areas, have a $10,000 application fee, and seemingly need to be individually approved by city councils, and other authorities.

So due to the limitations of TIFs, Enhanced Enterprise Zones are a more open model. EEZs are potentially open to a larger number of of adjacent census tracts, can include more industries, have much lower filing costs, and are easy to get approved if they meet the stated criteria. Darn thing is that EEZs were intended for underdeveloped or areas likely to include blight, –and blight designations have led to eminent domain abuse in a number of places around the country. There are side effects.

Economic development proponents advertise the many job creating benefits of the growing number of “tools in the toolbox” that are available these days. Opponents come mainly from two quite diverse camps it seems: 1.) the progressive left that doesn’t like anything benefitting business interests over workers, or the environment and such; and 2.) free market advocates who don’t like the tilting of the playing field through what they consider to be economic interventionism.

This is not to say members from either camp couldn’t find positive aspects in these programs, though. The progressives might like to see low-income housing, historic preservation, or green energy receive these credits, as it advances their interests; whereas general business or sprawling residential development is seen as bad, so they’re against those things. Free market advocate Congressman Ron Paul (R-Texas) has said he always votes for tax credit bills – which might seem perplexing, based on his libertarian reputation – but he says that “at least they lower taxes for SOMEBODY.” So from the fellow who has said he would like a 10% flat income tax, then ultimately one at a flat 0%, I guess his theory is that even if it is hand-picking one person to get a tax cut, that’s a step in the right direction.

MAYBE TIFS AND EEZ DON’T ACTUALLY GO FAR ENOUGH

With that in mind, maybe since TIFs are so restrictive in offering tax breaks, EEZs are at least much more accessible to a wider-array of businesses, and have much less red tape and overhead costs. So maybe EEZs are better?

And if offering tax recycling to only A FEW industries is good, perhaps it would be better to next open them up to MORE industries or even ALL businesses in an area.

And if a 50% reinvestment of new property taxes is good, let’s make it 100%.

And if this is good for NEW business expansion, then apply it to EXISTING businesses, too.

And if a LIMITED AREA is good, then expand EEZ-like areas to the ENTIRE STATE. I hear that the entire state of Kansas is an Enhanced Enterprise Zone – is that better or worse?

And if EEZs are good in reducing red tape in the application process, then maybe waive the application process altogether.

Really, should not the end-game be to just eliminate Missouri’s business income tax, as well as all property taxes on all businesses everywhere? If so, how weak are the proposals of the EEZ advocates.

Now, no type of fundamental tax reform will happen overnight, just as it has taken years for the pro-business tax credit programs to build up. Replacing the money that now goes to schools and fire protection and local streets would be a project, perhaps in multi-year phases. In fact, TIFs and EEZs have school boards and other tax entities concerned somewhat, but they have been largely convinced by proponents that tax credits are the way to grow the economic pie and seem to be generally placated with this hope.

So we now live in a world where free market folks are arguing against the notion that lower taxes grow the economy, and social services managers have bought into an unusual variety of the Laffer Curve. There’s of course more to it than that, but we should not be surprised by the seemingly unusual alignment of political bedfellows these days, or that the average citizen is confused about what “pro business” means anymore. Fundamental tax reform would yield a better world, yes; but it’s not politically palatable…yet.

WHAT’S A PERSON TO DO?

In summary, it seems that the community of honest businesspeople has become resigned to a world where they are hamstrung by high taxes and excessive regulation. Therefore these discouraged entrepreneurs have become convinced that their best hope of prosperity is the pursuit of various tax credits and reduction programs. This type of half-hearted trickle-down economics is admirable, in a way, but sure has side effects, and is a less than ideal strategy. In fact, they are selling themselves short, and further entrenching economic interventionism; ensuring more headaches for themselves over the longer term.

Former Pres. George W. Bush’s slogan “political capital” referred to a leader selectively using his limited influence and mandate. I believe the business community should reallocate its finite political capital from the current course of accelerated tax credit pursuits, and instead expend it toward a more straight-forward campaign of reducing regulations and taxes across the board, for as many industries as politically palatable. This would not be fun, and the left wouldn’t take it lying down; nor would the mercantile interests built up in the halls of government who see economic freedom for all as a loss to their favored treatment.

But perhaps with a stagnant job market and continued failing (and scandalous) “job creation/stimulus” projects, a few more political leaders (with the persistent and vocal support of their constituents) will emerge who have the courage to return to the historic free enterprise platform of lowering taxes and reducing unnecessary regulations, instead of trying to get legislatures and bureaucrats to throw a selected few businesses a bone from time to time. There are a few who stick their necks out occasionally and they need our support just as much as (if not more than) the many tax credit proponents who need our continued chastisement and educational efforts.

Steve Spellman

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