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Columbus
Dispatch...
Tax-expenditure
reform could save the state a bundle
By Mark Cassell
February 13, 2011
Imagine lawmakers in Columbus pass a $7 billion stimulus package
designed to create jobs. Now imagine that they do this year and after
year, passing multibillion-dollar stimulus packages. Now consider that
Ohio not only fails to add any new jobs but instead loses hundreds of
thousands of jobs each year the stimulus program is in effect. How, you
might ask, could policymakers continue to pass such massive stimulus
packages with so little evidence to suggest that they work?
Welcome to the world of tax expenditures. Tax expenditures are spending
programs implemented through the tax code. Rather than a grant to an
individual or firm, tax expenditures dole out public assistance by
reducing a firm or individual’s tax burden. From an accounting
perspective, tax expenditures and grants are identical. In either case,
government subsidizes specific behavior for a public purpose. And in
Ohio, according to the state’s Department of Taxation, we spend about
$7 billion a year on tax expenditures specifically to create jobs. The
problem is Ohio has lost jobs, not created them.
Gov. John Kasich and Ohio lawmakers are considering a range of
solutions to address the state’s fiscal woes, including cuts to higher
education, massive cuts to local governments, cuts to Medicaid and
privatization of public services. Most of these solutions will do
little to stimulate the economy and instead just shift taxes away from
the state and onto local governments.
A better solution would be to focus on tax expenditures since there’s
little evidence that, taken as a whole, these subsidies have done much
to create jobs. Tax expenditures continue because, unlike grants or
appropriations, we don’t see the money spent. Consider some examples:
For 47 years, Ohio has given a sales-tax exemption to utilities that
purchase pollution-control equipment. Never mind that the equipment
purchases utilities make for pollution control are mandated by
environmental rules. The sales-tax exemption thus subsidizes something
that would occur anyway. Ohio brewers and beer importers receive a
credit on beer and malt-beverage taxes they pay just for paying part of
them a few weeks in advance. And Ohioans who purchase fractional shares
in jet aircraft - in effect, timeshares for those wealthy enough - pay
only a tiny share of the sales tax they would otherwise because of an
$800 cap on the total tax levied per aircraft.
Why do tax expenditures continue? Because once in place, the
appropriation falls from public view and becomes the domain of special
interest groups and lobbyists who ensure the subsidies’ continuation.
As a result, there’s little oversight of tax expenditures. And
governments typically rely on firms (and lobbyists) to determine
whether the subsidy is still necessary. Not surprisingly, during the
time we’ve seen massive jobs losses, tax expenditures have stretched
out over years, even decades. A culture of tax-expenditure dependency
has developed.
Two solutions could help address the problem:
First, lawmakers should pass a one-year moratorium on all tax
expenditures. Such a moratorium would not only cut Ohio’s budget
deficit by more than half, it would enable lawmakers to take a careful
look at one of the most expensive job-creation programs in the state.
With the benefit of a one-year moratorium, lawmakers could study the
program and decide which subsidies create jobs and which do not.
Second, future public support should be in the form of a grants rather
than tax expenditures. Ohio should absolutely continue to aid firms
that require short-term public assistance to grow and expand their
business and, in turn, create jobs. However, just as qualified students
receive grants or loans to pursue their higher-education goals,
qualified firms should also be eligible for grants or other subsidies.
From a public accounting standpoint, the shift from tax expenditures to
grants would be identical. The change would, however, have significant
administrative and political implications. It would require lawmakers
to formally appropriate funds to the program each year, enabling
subsidies to businesses to see the light of day. The change from tax
expenditures to grants would also give us the tools to determine which
subsidies work and how much subsidies cost Ohio taxpayers.
In short, with these simple recommendations, Ohio could do exactly what
Kasich has called for: cut spending and reduce waste.
Mark Cassell is an associate professor of political science at Kent
State University.
Read it at The Columbus Dispatch
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