Credit claims are poorly scripted

by John Hood, John Locke Foundation and NC SPIN panelist, July 21, 2014.

When liberals debate tax policy, it can be hard to keep track of their current positions. They keep changing.

Right now, for example, Democratic politicians and left-wing activists are castigating Republicans in the General Assembly for proposing a reduction or elimination of North Carolina’s tax credit for film and television production. They say that the tax break, with a state fiscal impact of $61 million a year, is critical to luring and retaining businesses that directly or indirectly employ thousands of people a year.

Yet most of these same Democratic politicians and left-wing activists have previously argued that state taxes are not a significant factor in business decisions — that the taxes are too small to matter in the whole scheme of things and that states with lower taxes don’t grow faster, all other things being equal, than states with higher taxes.

Are movie moguls and TV producers the only business leaders who care about their tax burdens? Are media-production jobs the only ones that state policymakers should strive to attract and retain?

Here’s another consistency problem with the Left’s tax claims. Last year, when Gov. Pat McCrory and the legislature enacted historic, pro-growth tax reform — including the passage of a modified Flat Tax — liberals complained that the measure eliminated the state’s Earned Income Tax Credit. Citing its absence, they then claimed that North Carolinians of low to moderate incomes would actually experience a net tax increase from tax reform, with only wealthy taxpayers coming out ahead.

But when my colleagues and others pointed out that the state’s sales tax burden had dropped by nearly $1 billion in 2011, which lowered the burden on low- and middle-income taxpayers far more than the disappearance of the Earned Income Tax Credit raised it, liberals denied the significance of the event. The Republican-led legislature didn’t actually cut the state sales tax in 2011, they insisted. They simply failed to extend a temporary sales-tax increase that had been enacted two years earlier.

That’s technically correct, although whether to extend that sales-tax increase was a highly contentious and partisan issue during the 2011 legislative session. Here’s the problem, however: by that logic, the Republicans didn’t eliminate the Earned Income Tax Credit, either. It was also originally enacted as a time-limited measure, back in 2007, and was set to expire in 2013. The Republicans simply chose not to reauthorize it, arguing that the larger per-child tax credits and standard deductions for single parents with kids in the 2013 tax-reform measure accomplished a similar objective.

Liberals can’t have it both ways. They can count the 2013 expiration of the Earned Income Tax Credit as, in effect, a tax hike on the poor. But then they have to count the Republicans’ sales-tax policy in 2011 as, in effect, a much-larger tax cut for the poor. On the other hand, they can say that the dropping sales tax was nothing more than a temporary measure going away. But then they have to give up their talking point about how McCrory and the legislature “raised taxes on the poor to pay for tax cuts for the wealthy.” (They ought to do that, anyway, since the claim is incorrecteven if you treat the expiration of the Earned Income Tax Credit as a tax hike.)

As for the film incentive, it is hypocritical and unpersuasive for politicians and activists to favor a special tax break for one industry and oppose general tax relief for all industries. On empirical grounds, they have the worst of the argument. While there is strong research support for the proposition that states with lower overall tax rates on business tend to grow faster and create more jobs than states with higher tax rates, most studies of targeted tax credits show no net economic benefits.

If North Carolina is going to force its citizens to help finance TV and movie production, it should do so in a straightforward manner, with a fixed-dollar grant program as the Senate has proposed. Welfare should be doled out as on-budget spending, not hidden in the tax code.

http://www.carolinajournal.com/daily_journal/index.html