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February 5, 2007
Taxes Matter, but Not Really
by David Brunori

Full Text Published by Tax Analysts®

Document originally published in State Tax Notes
on February 5, 2007.

I was going to lead this column off with a tirade against tax credits for the movie industry. That was before I read an article in The Topeka Capital-Journal that said that, in a poll of its members, the Kansas Chamber of Commerce found that 31 percent of business leaders said excessive taxation was the state's number one problem. That in and of itself is not terribly surprising; we have seen business leaders complain about high taxes in states with a lot lower tax burdens than Kansas's.

But the chamber also found that 46 percent of the state's business leaders did not know that Kansas eliminated the personal property tax on all new investment in equipment and machinery. That tax cut had been hailed by the chamber and many other folks as critical for future investment in the state.

And the chamber polled its own members. Don't they read the chamber's newsletter? Don't they visit the Web site? Don't they read the newspaper? The business community keeps telling us that taxes matter. Then Kansas eliminated one of its most unpopular taxes, and the business community is hardly aware of it. Stunning.

Kansas political leaders are now considering repealing or greatly reducing the state's franchise tax and reducing the corporate income tax. They are considering those cuts because the business community is telling them that the state has to be more competitive.

Now the Tirade on Movie Tax Breaks

Back in 2005 North Carolina joined the crowd and began offering tax breaks to movie producers who filmed in the state. North Carolina politicians liked the idea of getting some of that Hollywood pizazz in Raleigh. Doesn't everyone want megalomaniacal movie stars looking down their noses at the locals?

North Carolina offered production companies that spend at least $250,000 on goods, services, and taxable wages in North Carolina an income tax credit equal to 15 percent of the value of the expenditures. The credit was capped at $7.5 million for feature films. But it was refundable, kind of like the earned income tax credit, only for rich folks.

Like all tax incentives, tax credits for movie producers are bad tax policy. There is nothing fair about giving multinational movie companies a break while ignoring the men and women who actually pay to see the movies. There is nothing fair about giving a movie company a break while ignoring the in-state companies that have already created jobs and made investments. The tax laws are supposed to be as neutral as possible -- that is, they are supposed to have as little effect on economic decisionmaking as possible.

Yes, I know no one cares about the principles of sound tax policy. But it doesn't take a genius to know that tax credits like this don't work. None of the states offering tax credits are becoming movie-producing giants. Heck, Kansas offers tax credits to movie producers. But no one is going to confuse Main Street in Wichita with Hollywood Boulevard. Another problem is that most states can't quantify how much tax revenue they give away or how much the movie companies are actually contributing to the state's economic development.

But the real problem is the fight that is going on in North Carolina. A movie called Hounddog, starring the ever-lovable Dakota Fanning, was filmed there. The company that made the movie got the tax credits. But Hounddog was no Sound of Music. In the movie, Fanning plays a nine-year-old who is raped.

Politicians in North Carolina want movies made there, but not movies depicting child rape. Those politicians are willing to provide tax credits for movies filmed in the state, but not for movies that they find, well, distasteful. Now, North Carolina already prevents the tax credits from being given for offensive movies. The state does not define offensive, but I am sure the politicians know it when they see it.

But that is not enough for some. Sen. Phil Berger (R) is proposing a law that would require the state to approve the scripts of all movies that would receive the credit. Berger says that if the state is going to pay for it, the state should be able to OK it. The idea is that a committee of fine, upstanding North Carolinians would decide who gets the tax credits and who doesn't. Berger does not specify what the standard of review would be. The X-rated stuff will definitely be out. Actually, anything remotely sexual might be out. Violence is probably out as well. Movies depicting some religions in a particular light will either be in or out, depending on the religion.

It is a ridiculous way to run a tax system.

More Incentive News

A group of University of Kentucky economists just completed a study of tax incentives in their state. They found that the state granted $788 million in tax incentives since 1989, for a total of 127,137 new jobs created. But they also found that 107,891 of those jobs would have been created even without the incentives. So Kentucky paid $788 million for 19,246 jobs. The economists -- Kenneth Troske, William Hoyt, and Christopher Jepsen -- performed the study for the Kentucky Cabinet for Economic Development.

Another Lottery Sale

Michigan is facing an $800 million deficit, so you might think the Legislature and Gov. Jennifer Granholm (D) would be considering tax increases, service cuts, or some combination thereof. But of course you would be wrong. Instead, lawmakers want to sell the state's 35-year-old lottery to private investors because they believe they can get $10 billion for it. Indiana and Illinois are thinking about selling their games of chance as well. Midwestern politicians are either very crafty or on drugs.

Last year during a lecture to a high school class I asked the students to come up with different ways the states could raise money other than taxes. One kid said they should "hire" their prisoners out to factories. Another suggested putting pay toilets in all state government buildings. Perhaps selling the lotteries seemed too ridiculous to the students.

Speaking of Michigan

Everyone who follows state policy knows the Michigan single business tax is scheduled to expire at the end of the year. The state will have to find $1.9 billion to replace the lost revenue. Senate Republicans have come up with $1.5 billion and say no more revenue is needed, at least not from the business community. The Republican proposal is way complicated. Michigan tax lawyers will love it.

Basically, businesses with gross receipts between $350,000 and $15 million would have a choice between paying a modified gross receipts tax or a business income tax. Businesses with more than $15 million in receipts would have to pay a business income tax and a franchise tax reflecting net worth.

Fiscalization of Traffic Fines

Arizona Democratic Gov. Janet Napolitano's plan to place cameras on state roads to catch speeders is widely known, but few people realize it is a money-raising tactic. Neither Napolitano nor the Legislature wants to raise taxes. So the politicians in Arizona are doing what politicians in other states do -- looking for other sources of money. In fact, the legislators are debating who will get the millions of dollars in fines the state is expected to collect.

I don't sympathize with those who flout traffic laws. But shouldn't the point of fines be deterrence? The political leaders in Arizona are talking about using the money from the fines to pay for road construction. What principle of sound fiscal policy lies behind that proposal -- that the more people speed, the more money the state will have to fix potholes? Can't Napolitano and the legislators just raise cigarette taxes or open a casino to get more money?

Inheritance Taxes and Minimum Wage All Tied Up

Indiana House Republicans offered a bill that would end the state's inheritance tax by 2011, but they added a stipulation that the minimum wage in the state could not surpass the federal minimum wage laws. The Republicans are obviously very concerned about the little guy in Indiana. From what I hear, they are hoping Congress won't raise the minimum wage. The Indiana proposal would have ensured that the state didn't try to act on its own.

Indiana is one of only 13 states with an inheritance tax. The Democrats defeated the Republican proposal. They are calling for greater exemptions for the inheritance tax (from $100,000 to $200,000) and an increase in the minimum wage to $7.50 an hour.

The inheritance tax is unsound in a federal system. At some point, the really rich will move to a state with no such tax and the burdens will fall on those who are unable to leave. But I wish someone could explain why both the Republicans and the Democrats are linking the inheritance tax to the minimum wage. The public is not being served by that.

Tax Breaks for College

The Minnesota Legislature passed, and Gov. Tim Pawlenty (R) signed, a law giving students and parents an income tax deduction of up to $4,000 for college tuition. The tax deduction is not surprising -- who doesn't love college students or their higher-income, more likely to vote parents? By the way, the federal government has about 100 different tax breaks for higher education, so you know those breaks must be sound policy.

Tax Breaks for the Super Bowl

Some Indiana legislators are considering offering tax breaks to the National Football League and the championship contenders if Indianapolis gets to host the 2011 Super Bowl. The lawmakers would like the ultimate game to be played in the soon-to-be-finished Lucas Oil Stadium. Duane Thomas of the Dallas Cowboys asked, "If this is the ultimate game, why is there another one next year?"

The lawmakers are talking about offering sales tax exemptions to the NFL and the teams. But as businesses, the teams should get exemptions anyway. Other lawmakers are talking about income tax breaks for the teams and the players.

I have two pieces of advice: First, the Indiana lawmakers should save the tax expenditures and watch the game on TV. Second, take Chicago and the points. Prediction: Colts 24, Bears 21.

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The Politics of State Taxation is a column by
State Tax Notes contributing editor David Brunori, who welcomes comments at

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