Commentary: Time to break big business of their subsidy habit

E. Thomas McClanahan is a columnist for the Kansas City Star.
E. Thomas McClanahan is a columnist for the Kansas City Star. MCT

When the Missouri legislature served up its recent gift to Ford Motor Co., Gov. Jay Nixon said that thanks to the $15 million-a-year subsidy, the state could "make sure that our automotive industry remains vibrant for generations to come."

Make sure? Hardly. Ford didn't ask for this goody bag for its Claycomo plant and its Missouri supplier network. The company promised nothing. There are no guarantees the tax breaks will cause the company to upgrade its plant north of the Missouri River and maintain its existing work force.

The recent special legislative session, dedicated to coughing up the Ford package (and reforming state pensions), showed that the subsidies-for-development disease has become dangerously pervasive.

And no one knows how to stop it. Elected officials, developers and companies with large work forces have become addicted. The auto analyst Alan Baum of Baum & Associates told The Star: "The incentive is necessary in that companies are expecting states to provide the help." (Emphasis added.)

I've written in favor of development subsidies in older neighborhoods and downtowns as a means to counter the perverse incentives of the property tax: Owners who improve their property are "rewarded" with a higher tax bill, so without subsidies downtowns tend to rot. But the political problem is how to contain the special deals — how to say, "This far and no farther."

It's understandable that lawmakers would want to do something to protect the Claycomo jobs in the face of competing offers from other states that are equally shameless. Yet the whole process, despite the studied silence of Ford, had the feel of extortion. Ford never had to say a thing, but everyone knew the company was expecting something.

"It always has an unsavory feel," said economist Chris Kuehl of Kansas City-based Armada Corporate Intelligence. "It's not unlike the sports guy, dangling six different teams." Kuehl said he actually heard someone compare the Ford deal to the bidding war over NBA star LeBron James.

"These deals rarely yield what people hope they do," Kuehl added. "But states compete with each other, in a kind of race to the bottom. For every Missouri, there's going to be another more desperate."

The constant proliferation of loopholes and development subsidies is a sign that overall tax rates are too high. The late Sen. Daniel Patrick Moynihan observed that rates and loopholes exist in tension. When rates rise, loopholes come creeping back "like a hydraulic phenomenon," as he put it.

In Missouri, the favored loophole is the tax credit. The state income tax code is so full of them that last year it lost $584 million in revenue.

Once the process starts, it's almost impossible to stop. As Kuehl noted, hand out a tax break to one company, then another in a similar industry demands similar treatment and starts lobbying for it. The result is not only forgone revenue but rising complexity, which imposes its own set of costs.

Missouri Sen. Chuck Purgason, a maverick Republican from Caulfield, waged a quixotic fight and a marathon filibuster against the Ford package.

"Bottom line, Ford didn't ask for this," he said in a telephone interview. "What you're doing is rewarding one area at the expense of everyone else. I don't understand it."

The remedy proposed by Purgason, a GOP candidate for U.S. Senate, would be to get rid of the state income tax, which would make tax credits useless. He wants to replace the income tax with a bigger sales tax.

Given the growing complexity of the income tax, that would be fine with me. But it wouldn't stop economic-development termites from burrowing into the tax base. The cry would still go up: We've got to do something! Some other state is threatening to steal Missouri jobs! If Purgason's remedy passed, tax credits would be replaced by sales tax exemptions.

I wish I had some notion of how to put a stop to this, but I don't. I think it will go on until tax systems, at both the state and local level, are turned into Swiss cheese and become unsustainable — and more people begin to realize that to get rid of the loopholes and capture more revenue, you have to lower the rates. See Moynihan, above.