September 10, 2020 5:18PM

State Policy Favoritism and Corruption

California leaders are in the news for passing a misguided law that requires most independent contractors to be treated as employees, and then realizing how harmful that is and passing another law exempting dozens of politically important industries from the mandate. Lee Ohanian describes the law’s damage here.

Last year, “Assembly Bill 5 included exemptions for many politically‐​connected occupations like real estate agents and doctors, but ensnared many others, drawing particular criticism from musicians, independent truck drivers, franchise business owners and freelance writers.” Then in response to the public backlash, the California legislature passed Assembly Bill 2257, which exempts “many occupations in media, music and other industries from AB 5’s requirements.

Unneeded laws, such as this, that impose unequal justice generate endless lobbying, litigation, campaign contributions, and corruption as companies and labor unions jockey for special treatment from politicians.

State tax policy is rife with similar favoritism. Politicians impose ill‐​conceived and damaging taxes that induce affected businesses to howl in protest and lobby for relief, and then the politicians pass an array of “exemptions,” “incentives,” “abatements,” and “credits” for the lucky few. Politicians also use state tax codes to flex their central‐​planning impulses, passing breaks for sexy and high‐​profile industries such as solar power, data centers, and filmmaking.

In reviewing state budgets for Cato’s upcoming Fiscal Report Card on America’s Governors, I came across a 30‐​page summary of tax favoritism in the State of Nevada’s budget, which starts on pdf page 18 here. Starbucks received special grants from the state’s Catalyst Fund, which “incentivizes the expansion or relocation of businesses that will quickly result in the creation of high‐​quality, primary jobs in Nevada.”

Here is my interpretation of the various breaks:

  • Nevada mistakenly imposes sales tax on capital goods (rather than just on final consumption), and then it provides two‐​year abatements for chosen firms. Why two years? Perhaps to maximize campaign contributions and support from business lobbyists.
  • Nevada imposes a “Modified Business Tax” and then provides breaks to companies that jump through political hoops on hiring and expansion. The MBT lands on a portion of business payroll. Why not just impose a simpler across‐​the‐​board flat tax explicitly on employee wages? Because politicians want to create the illusion that businesses are paying for the cost of government, not workers.
  • Nevada’s local governments impose property tax on “business personal property,” such as machinery and equipment. That damages investment, so the state provides “abatements” to certain favored companies. But states should not impose property tax on business equipment at all, just as they do not impose it on washing machines and fridges in homes. Property tax should apply evenly to residential and business real property. Why do states impose property tax on business equipment? To hide tax burdens from the view of voters.
  • Nevada politicians act as central planners in providing complex sales and property tax breaks to favored activities such as recycling, aviation, data centers, workforce innovations, renewable energy, green buildings, and film productions such as the erotic thriller “Frank and Lola.” The state also provides abatements to large companies with more than $1 billion in investments, thus favoring them over small companies.

Nevada’s complex system of tax favoritism is misguided. State policymakers should apply property tax at a single flat rate to residential, commercial, and industrial real property, but not business personal property (machinery and equipment). They should repeal special business taxes (including the “Commerce Tax” and “Modified Business Tax”), which hide government tax burdens from voters. Finally, policymakers should impose Nevada’s general sales tax at a single rate on final consumption, not on intermediate goods and capital equipment.

Policymakers in every state should impose taxes that are simple, visible, equal, and neutral across economic activities. To grow, states do not need “economic development” bureaucracies such as Nevada’s that hand out narrow breaks, they just need lean governments and low, flat tax systems.

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