Experts Debate Whether Tax Cuts Tax Breaks Work

By: - April 8, 2014 12:00 am

Two experts agreed Tuesday that tax rates are part of the consideration when people and companies move from one state to another, but they were light years apart on just how much those tax rates influence location decisions.

Joseph Henchman, vice president of legal and state projects at the anti-tax group Tax Foundation, argued that “incentives matter and taxes matter. Taxes are not the only thing which affect individual and business location decisions, but they are one thing.”  The influx of people and companies to a low-tax state enhances that state’s economy, he said.

At the other end of the political spectrum was Jon Shure, director of state fiscal strategies at the liberal Center on Budget and Policy Priorities. Shure argued that if states concentrate just on lowering tax rates, or setting up tax breaks for companies to lure them to the state, they will underfund or neglect the things that really attract people to the state – education, infrastructure and quality of life.

The two debated at a forum sponsored by the Georgetown University Law Center.

“The evidence overwhelmingly points out that business people do not move from one state to another because of the tax policy,” Shure said. “It’s not happening.”

But Henchman pointed to wealthy athletes like golfers Phil Mickelson and Tiger Woods, who both moved from high-tax California to low-tax Florida when they started to make millions. And he said some businesses are moving from Kansas City, Mo., to Kansas City, Kan., after Kansas cut business taxes from 6.45 percent to 4.8 percent.

“Tax policy does in fact change people’s behavior in certain circumstances. It’s just a matter of finding out what those circumstances are,” he said.

Henchman said the lower business taxes will, over the long term, make Kansas more competitive, but he noted that the state did not make up the revenue loss from the tax cut, which he said is problematic.

Exactly, said Shure, who argued that the lower tax revenue is going to lead to lower quality schools and roadways, and in turn lead people to think twice about moving there. Shure argued that people move for jobs, schools, better weather and to be nearer family – all reasons that take a higher priority than tax rates.

“If states base policy on the idea that high taxes force people and lower taxes lure them in, they will be making a big mistake,” Shure said.

Both of the speakers addressed the issue of states competing for companies by offering tax breaks. Henchman pointed to tax breaks for film companies, such as the slimmed-down one that Maryland just extended to the company that produces Netflix’s “House of Cards,” so the company would continue filming in the state.

“They get people to cross borders,” Henchman said of individual tax breaks for companies.

Shure agreed that the tax breaks do lure businesses from one state to another, but said there’s nothing to stop a company from relocating again and again to seek a better deal.

“Businesses play states off against each other and seek tax breaks because they can,” he said.

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Elaine S. Povich
Elaine S. Povich

Elaine S. Povich covers education and consumer affairs for Stateline. Povich has reported for Newsday, the Chicago Tribune and United Press International.