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Don’t Subsidize This

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Don’t Subsidize This

New York is too fond of expensive giveaways to business—which don’t work, anyway. July 8, 2015
Photo by Andrew Burton/Getty Images

In 2014, New York governor Andrew Cuomo enacted tax reforms that lowered the statutory corporate tax rate, broadened the base, and simplified the code. It was a step in the right direction, but New York, which ranks 46th in economic health among the states in a new Mercatus Center study, remains a high-tax state with complex rules. Real reform would entail ending Albany’s continued embrace of ineffective tax subsidies.

New York is hardly alone in its enthusiasm for tax incentives; every state has at least one. They take various forms—sales-tax relief, direct write-offs, credits on income taxes—but the subsidies all have similar objectives: to attract out-of-state businesses, particularly to depressed regions and neighborhoods. Accompanied by rhetoric about jobs and development, such giveaways seem to have perpetual political appeal. Touting his START-UP NY initiative, which created tax-free business zones for tech start-ups, Cuomo claimed that the zones would “jump-start the upstate economy.”

Reality belies such rhetoric. Take, for example, New York’s biggest subsidy: the $420 million annual tax break for film and television productions, which dwarfs every other handout that Albany offers, including Cuomo’s widely advertised subsidies for his ten regional economic development councils ($220 million) and for venture-capital initiatives ($50 million). Though at least 40 other states offer enticements to the film and television industry, Albany’s version is remarkably generous, providing a fully refundable 30 percent tax credit on qualified production costs and an additional 10 percent credit on productions located in depressed counties.

New York does see a lot of film and television business. Some state residents find employment in the industry, and hotels and production-support services get customers. The notoriety spread by television and film likely contributes to tourism. But many of the personnel involved, particularly the highest-paid, come from out of state and return home when the filming or taping is done. Most of the jobs and contracts that go to New York citizens and businesses are, by the nature of film production, of relatively short duration. And it’s not clear that depressed regions benefit much from the extra subsidy that Albany provides. Most support services and other contractors, even if they are New York–based, come from other regions, and hotel stays are booked in more affluent areas.

So far, Albany hasn’t tried to quantify such offsetting influences, but Massachusetts has. When its department of revenue looked into the commonwealth’s also-generous film and television tax subsidies, it determined that the jobs created lasted, on average, less than three months, at a net cost of $118,873 per position. The numbers for New York would likely look similar.

However they’re presented, subsidies amount to top-down government direction of economic activity, which, experience shows, leads to overproduction of some goods and services and underproduction of others. Though tax subsidies are less heavy-handed than central planning, any misallocation of resources detracts from wealth generation. A firm that allows tax incentives to override more fundamental economic considerations can’t help but create less income and employment than it otherwise might have done. Albany might not care about optimal amounts of income as long as businesses are moving in from other states, but it will care if the inefficiencies eventually prompt these firms to close up shop. In the worst case, businesses become dependent on the subsidies for survival.

Firms moving from one state to another in search of tax subsidies don’t generate jobs in the numbers that governors like Cuomo claim. Manufacturers that might relocate to another state to take advantage of a tax break usually continue to source equipment and inputs elsewhere. Louisiana determined that 90 percent of the net increase in business and jobs from the inward migration of retailers came at the expense of established state companies. And it’s not apparent that tax subsidies even work as a lure: a recent study published in the Journal of the American Planning Association estimates that state and local tax considerations are too small a portion of overall costs to motivate migration by themselves and that nine-tenths of companies’ interstate moves would have occurred, anyway. The out-of-state firms, even if they moved for other reasons, nonetheless take the tax breaks, of course.

Governor Cuomo would make a better case for tax incentives if he could offer evidence of how they help, instead of just insisting that they do. Heavy use of tax subsidies leads to forgone revenues, shortchanging state services, and burdening taxpayers. Albany must make up the difference either by cutting back government services or hiking taxes, thus punishing every other business and citizen in the state not favored with tax breaks. The better choice for New York is simple: cut taxes overall and abolish subsidies.

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