Study: Selective Carve-Outs Make Poor Tax Policy
Lawmakers across the country have promoted specific, targeted tax breaks that encourage businesses to invest in their state. According to a recent study, these incentive programs are ineffective at promoting widespread economic benefits, despite being advantageous for certain firms and industries.
The study, published by The American Legislative Exchange Council (ALEC), examines “the use of public policy to benefit a specific industry, firm, or individual, as opposed to setting broad and generally applicable rules and policies that apply to society as a whole.” These include targeted tax breaks or cash subsidies for select firms, as well as preferential tax treatment for firms located in a given geographic area.
ALEC finds that while this type of tax favoritism is not illegal, these programs stunt a state’s potential growth. Tax carve outs, while helping ease the tax burden for select businesses, create an uneven playing field on the whole.
When select businesses are exempt from the standard tax rate, the tax base decreases. ALEC notes that “with a smaller revenue base, states must continually raise tax rates to get the desired amount of revenue.” Overall, this results in most businesses paying higher taxes, as they are forced to subsidize the lower tax burden of firms receiving preferential treatment.
To achieve a state’s greatest economic potential, carve-outs must be eliminated altogether. Tax policy should be competitive and equal for all businesses.