These common tax breaks are a disaster for small business

A few headlines from around the nation over the past few weeks:

And on and on it goes. Cities and towns all across the country routinely approve special tax breaks to encourage new investment, often in prestige real estate projects.

On one level, it’s an understandable calculus. The jobs and prosperity associated with new investment are much more important than a trickle of additional tax revenue. And oftentimes there would be no project — and thus nothing to tax — without the targeted tax break. The problem is that a targeted tax break doesn’t do anything to actually reduce a given area’s need for tax money. Taxation isn’t really reduced; it’s merely pushed off the shoulders of well-connected companies working on prestige products and onto the shoulders of small businesses that can’t afford lobbyists.

As Mark Robyn writes for the Tax Foundation, “Larger firms have a level of political and economic influence that is not enjoyed by smaller firms, and are more likely to secure special treatment” even as “tax incentives in one area means that the revenue will have to be made up in another area.”

The left-wing Institute on Taxation and Economic Policy agrees with the conclusion and observes that when targeted tax breaks do reduce revenue, “that means reductions in the public services that businesses use every day.” In other words, the Hotel Niagara’s windfall tax benefit may mean more potholes on the road, slightly slowing traffic and damaging business for small firms all across the Buffalo area.

Consensus on this point exists across a surprisingly wide range of the ideological spectrum. The conservative Mackinac Center argues that these targeted breaks “do more harm than good,” and libertarians at the Mercatus Center argue that “policymakers often overlook the unseen and unintended negative consequences of these targeted benefits, including increased lobbying and cronyism, costly misallocation of resources, and a system that is biased against smaller firms.”

And yet, for all the consensus that exists about the evils of targeted tax breaks, they are devilishly hard to do away with. The basic problem is competition. As long as a city or state fears that its neighbors may offer a targeted tax incentive to poach a big employer, it needs to be prepared to offer its own to stay in the game.

Well-informed jurisdictions can, at best, try to manage to restrain themselves to only offering the tax giveaways with the highest possible reward.

Still, at best this is a trickle-down strategy. You hope that by luring a handful of whales to town, the smaller fry will be able to sustain themselves like barnacles pulled along in their wake. And of course not every jurisdiction is well-informed, intelligent, or even basically honest about its dispensing of tax favors. But if all the different localities in America were able to band together in a cartel and categorically reject targeted tax breaks, the whole country would end up better off.

Fortunately, while business cartels to restrain competition are illegal, there’s nothing wrong with governments banding together in this way. It could happen voluntarily at the regional level, but even better would be federal action. Congress dispenses billions annually through various grant programs, some of which could be made conditional on signing up for a No Tax Breaks League. Or Congress could create a new pot of money and hand it out to jurisdictions that sign up and help level the playing field between big businesses and small ones. It’s not a particularly sexy issue, but it is a rare topic on which there seems to be little disagreement between liberal and conservative experts and thus a place where enterprising politicians looking to show some “get things done” spirit in an era of gridlock could find room to collaborate.