(Note: This article was submitted to the Seattle Times on May 26 for consideration for publication in the Opinion section. It addresses a May 18 Seattle Times editorial on corporate tax breaks).
I believe that the Seattle Times Editorial Board has adopted the wrong view on corporate tax breaks for Washington’s largest corporations (“Extend data-center tax break,” May 18). The Times’ primary argument is that the tax breaks don’t really cost money, because the facilities will not be located in Washington State without them. This rationale suffers from four drawbacks: factor breadth; lump of labor fallacy; short-term perspective; and ignoring that what’s right is often good policy.
Factor breadth. Companies don’t make site location decisions based on a single factor, but multiple (e.g., quality of the labor force, transportation costs, energy costs, infrastructure and many others). Washington State offers many advantages to industry, and is ranked by Forbes as the 9th best state in the union for business. Similarly, regarding taxation, companies evaluate the overall tax environment of a state, not one component of it. Washington, with no income tax, is deemed to have the 6th best business tax climate in the nation by the conservative Tax Foundation.
Lump of labor fallacy: The lump of labor fallacy holds that adding new workers into an environment will increase the unemployment rate. This is inaccurate because the new workers bring needs that fuel demand, and skills that generate supply. The U.S. unemployment rate does not increase as its population grows. A corollary to this fallacy is that an economic project that is sited in Iowa instead of Washington will lead to an enduring hole in the Washington economy, leading to a higher unemployment rate. This is also inaccurate – as long as Washington’s business environment is competitive (and it is, as noted above), other firms will take advantage of its opportunities and relocate or expand in the state.
Short Term Perspective: If a business operates in Washington but receives a tax break, this means one of two things: other businesses (or individuals) have to pay a higher tax rate to compensate for this business’ lower tax rate; or state spending must be cut. Tax increases for other businesses will naturally increase their incentive to leave. Reductions in state spending will hurt areas such as education and transportation – and this in turn erodes the state’s business competitiveness. There is no free lunch: one firm’s tax incentives unfairly harms other businesses and residents and/or diminishes the overall business infrastructure.
Moreover, as states increasingly compete for business investment by using tax-breaks, it fuels a race to the bottom. If one moves the clock forward twenty years, what will have been achieved is an economically inefficient reshuffling of corporate assets (i.e., siting decisions driven by financial incentives rather than economic fundamentals), with the net result being the transfer of tax responsibility from large corporations to smaller businesses and citizens. As a time when U.S. income inequality is at a higher level than any society in world history (source: economist Thomas Piketty), this is exactly the wrong prescription for the U.S. political economy.
What’s right is often sound policy: Why should Boeing and Microsoft not have to pay their fair share of the costs for educating their workforce, building roads to transport their products, providing a legal system to protect their intellectual property, and so on? This is a moral question with no sound answer. A major branch of modern U.S. scholarship is focused on assessing why some societies have thrived economically while others have languished throughout history. A recurring theme is that economically successful societies were often forced to do what is right, rather than succumbing to the temptation of doing what is wrong. For example, in Why Nations Fail (2012), Harvard’s James Robinson and MIT’s Daron Acemoglu posit that one of the primary reasons that North America became so economically successful relative to South America is that its early Europeans (unlike those in South America) were unable to enslave en masse the indigenous population and therefore had to establish more inclusive economic institutions. Slavery is an institution that benefits the elites of a given era, but ultimately devastates societal growth prospects because it violates one of economics’ key objectives – to have individuals apply their skills to their highest productive potential. Slavery situates would-be doctors, engineers, teachers, etc. as agricultural laborers. There is a thematic parallel with corporate tax breaks. Doing what is wrong (allowing large corporations to transfer their tax obligations to others) will benefit the elite in the short term, but to the eventual detriment of society at large.
The Times’ argument in favor of corporate tax breaks is based on an evaluation of the issue from an overly narrow perspective. A perspective that incorporates more factors and adopts a longer term horizon suggests the opposite conclusion. Washington State should focus on developing a fair and competitive business environment for all its companies. This entails investments in the fundamentals that attract and support business – education, roads, quality of life, etc.; not financial payments that benefit some and harm others while doing nothing to develop the state’s business infrastructure. In the long term, this right approach will benefit the state’s political economy as well.
- John Stafford