Texas and Tax Competition

October 28, 2011

Remember that little mess John Kerry got himself into over his yacht?  He had the yacht registered in Newport, Rhode Island, though he summers in Nantucket, Massachusetts.  When the Boston Herald discovered that Kerry was getting a tax break of around half a million dollars from this little trick, Kerry was embarrassed badly, and even snapped at reporters asking questions about the transaction.  It took five days, but eventually Kerry agreed to pay the taxes owed to the state of Massachusetts.

Most people frown on mega-wealthy people dodging taxes by manipulating small details and exploiting tax loopholes.  Ask people what the problem with the tax code is, and you will hear among the answers that there are too many loopholes that the rich use to get out of paying taxes.

In spite of the fact that those rich, even WITH loopholes, are paying a heck of a lot more proportionally of the national tax revenues than the level of national wealth they control, this mantra still gets recited over and over: “The rich aren’t paying their fair share.”  But in this climate, with major national tax reform unlikely to be passed for at least a year, conservatives can turn this situation into an object lesson, and an opportunity for growth in states with fiscally sound elected officials.

It’s called tax competition, and it can be a useful tool to spur elected officials to deal seriously with ridiculously high taxes.

As the Center for Freedom and Prosperity explains:

When labor and capital have the ability to escape bad policy by moving across borders, politicians are more likely to realize that it is foolish to impose high tax rates. And they oftentimes compete for jobs and investment by lowering tax rates. This virtuous form of rivalry helps explain why so many nations in recent years have lowered tax rates and adopted simple and fair flat tax systems.

And the proof is beginning to mount.  Just this week, Illinois lawmakers are examining a proposal to eliminate a tax that is currently imposed on millions of electronic trades made through CME Group and CBOE Holdings by parties from outside the state.  Even newly-elected Chicago mayor Rahm Emanuel has lobbied the legislature to take action, since these groups are making noises about moving their operations out of the state.

The Texas Legislature dealt with tax competition head-on this past session, when Rep. John Davis authored a bill to cap state taxes on yachts.  His argument was that Florida had done this same tax reduction in 2010 and that Texas would lose yacht sales to Florida.  The argument was ridiculed and mocked all over the internet, with many people tying the bill to the concurrent “education cuts” before the legislature.  “They want to give tax breaks to rich people, and pay for it with money for classrooms and teachers!”

There’s no way to win that conversation when it’s devolved to that level.  Even conservatives piled on against lowering the yacht tax.

But consider this; president Obama has been making a case for eliminating tax breaks for corporate jet manufacturers, claiming that their greed is hurting poor people.  Compared to the size of the deficit, the additional revenue would be miniscule.  That particular tax break, which encourages businesses to invest in new equipment, just means that company owners can write off the entire cost of equipment they buy in the year they buy it, instead of writing the cost off over a period of years.  Given that incentive, isn’t it natural for those businesses to buy some heavy-duty machinery?  And don’t those machines need to be manufactured?  And don’t workers do the manufacturing?  So doesn’t that keep people employed in an economy that is having such problems reviving?

Sure it does.

The knee-jerk response to proposed tax cuts is to compare the end-user of a tax break (in this case, corporate jet manufacturers and purchasers) to some other group in society who are dependent in some form on the government (children, the poor, the elderly).  And it works.

Conservatives need to become more aggressive in defending lower taxes imposed by states.  Back to the Texas yacht tax; whether the tax break on yachts would have added or subtracted to tax revenue in Texas doesn’t matter in the big picture.  The important thing is to continue to find ways to lower taxes and encourage more businesses to move to Texas.  If Texas were to become an island paradise of low taxes in a sea of red-ink states, businesses would flock to Texas even more quickly than they do now, bringing more jobs and more opportunity.

Those red-ink states have two choices in responding to their business community leaving their state:  raise taxes to cover the loss of revenue, effectively spreading the misery of high taxes between a shrinking pool of taxpayers; or lower taxes to become more competitive and attractive as a place to do business.  If Texas sets the standard, not only will we prosper, but we’ll lead other states in the right direction as they are forced to compete to hang on to their own tax base.

And if we choose that path, not only does Texas win; everyone wins.

 

-Felicia Cravens

 

 


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