The Return of Corporate Tax Incentives Is a Bad Omen for Blue States

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In September, New Jersey officials announced a plan to borrow $4.5 billion to cover what The New York Times referred to as a “gaping financial hole” in the state’s budget. It was an understandable move given the Covid-19 pandemic’s deleterious effect on employment and local tax revenue, and Democratic Governor Phil Murphy’s advisers said they wished to avoid the “slashing of government services” that working families rely on. To that end, the budget also included a millionaire’s tax.

With direct federal aid to local governments off the table in the most recent Covid stimulus talks, thanks to Senator Majority Leader Mitch McConnell’s apparent desire to see widespread austerity spending cuts and service reductions, states like New Jersey, which cannot print their own money as the federal government can, have to make difficult decisions about revenue and expenditures. Terrified of borrowing and reluctant to raise taxes (on the wealthy, at least), most states balance the books in regressive ways. As an Economic Policy Institute study found, in the wake of the Great Recession, state and local spending on K-12 education “did not grow at all (adjusted for inflation) between 2008 and 2015.” Much of the sluggish nature of the Obama-era recovery, in fact, can be attributed to this state and local austerity.

Which is why it was heartening to see a Democratic-run state signal that it was willing both to raise revenue from the rich and borrow money if necessary, in order to get through what could still be a temporary budget shock without harmful cuts to services that its citizens rely on. But it was much less heartening when, a few months later, New Jersey officials suddenly announced the return of a giant tax giveaway to politically connected corporations. Crafted in secret, made public last week, and voted on with rapid speed, the new $14 billion corporate tax incentive program replaces one that collapsed in scandal and corruption last year, following revelations that much of the program benefited a local party machine boss and his family and associates.

Corporate tax incentive programs are a largely discredited means of boosting an economy, and they also perpetuate a race-to-the-bottom competition between states to offer the most giveaways to corporations that threaten to move across state lines. Even when they are not riddled with flagrant corruption, as New Jersey’s program was practically designed to be, they remain an incredibly overpriced and ineffective way for a government to “create” jobs. And they have real costs to a state’s ability to spend money on actually useful things. Under New Jersey’s revamped tax incentive program, The American Prospect reports, “the state is agreeing to forgo $1.4 billion in revenue a year to pay for these subsidies.” And that was before New Jersey lawmakers added an additional $2 billion in tax credits for film and television production.

This is bad enough just as a story of one state’s economic decision-making. It could also be an omen of what state and local budget debates are going to look like over the next year. New Jersey under Governor Murphy at first seemed to be charting a course away from regressive austerity, handouts to corporations, and low tax burdens for the well-off. This is several steps backward.

In the continued absence of direct federal aid, or unprecedented action by the Federal Reserve, it is depressingly easy to imagine another nationwide pattern of disinvestment like the one we saw after the Great Recession, with states too terrified of alienating their “tax base” to actually consider taxing it. The “good news” so far is that the unequal nature of the economic downturn—which has harmed low-income workers much more than high-income ones, while the rich have only gotten richer—means many states have not seen the apocalyptic revenue declines they predicted earlier in the year. The bad news is that this will be used by the usual suspects in politics to argue that covering these shortfalls with progressive taxation is a bad idea, and states that already rely on heavily regressive tax systems—in particular, the so-called “low-tax” states, which are actually “high taxes for poor people” states—will see no reason to change course.

In much of the country where Democrats actually hold power, this could be an opportunity to use it to advance an agenda of actually making government work, leveraging the largely untouched income and growing wealth of their richest residents to more efficiently provide services, build infrastructure, and directly help residents. Instead, if New Jersey is any guide, they will return to the comfortable old ways of using complicated tax incentives aimed at large corporations to indirectly spur vaguely defined “growth,” while cities and municipalities pare back spending on the parts of the state people actually interact with every day.

In a few years, we’ll probably all read in ProPublica which politically connected wealthy investors actually benefitted from the program, and how much revenue—which could’ve gone to giving people better health coverage or building new rail lines or buying battery-powered electric city buses or paying teachers more—these investors leeched from the system. The Cool Zone, it turns out, is an economic opportunity zone as well.

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