Tax cuts are better than corporate handouts at creating jobs

Originally published in the Washington Examiner

Carol Park, James Hohman Aug 27, 2019

Last year, Maryland’s $8.5 billion bid to attract Amazon’s second headquarters to the state resulted in embarrassment as the state lost out to neighboring Virginia. Despite this, Maryland continues to rely on targeted tax breaks to attract jobs.


Maryland offers a wide range of tax incentive programs that vary in design and scope. Its “Job Creation Tax Credit ” provides a total of $4 million in credits for businesses that create new jobs in the state. It also has a separate $12 million fund for biotechnology jobs, and awards film producers tax credits that cover up to 25% of the production costs incurred in Maryland. The list goes on.


These programs are intended to attract new and better jobs and diversify the economy. But they fail to perform that task, and they drain taxpayer resources in the process.


According to Andrew Bauer, a senior economist at the Federal Reserve Bank of Richmond, Maryland’s economy has become “less dynamic” over the years because of a slowdown in business formation and job growth. This year is not going well. The state not only has lost jobs, its job losses are the worst in the country.


Even with the decrease in dynamism, there is a lot of turnover. Private-sector businesses shed 523,000 jobs in the state’s 2018 fiscal year and added 541,100 jobs, showing a small net increase. Maryland’s business tax credits can be credited for only 2,600 of those jobs. If residents had to rely on the state’s business subsidy programs to replace the jobs lost each year, they would be able to replace less than one half of 1%.


Maryland’s extensive assortment of targeted tax incentives are not sufficient to bring a steady flow of jobs and keep jobs from leaving Maryland. They don’t operate at the speed and scale of the state economy.


Even if the programs have small positive effects, they are unlikely to justify their costs. Maryland’s Department of Legislative Services found “no evidence that the credit has increased investment in biotechnology industry.” And another DLS study found that the state’s film tax incentives only returns 6 cents for every dollar spent to the state government, and 4 cents for every dollar spent to the local governments.


Tax incentives cannot offset Maryland’s unfavorable business tax climate. According to a recent survey by the University of Baltimore and the Maryland Public Policy Institute, 63% of Maryland businesses that were surveyed reported that taxes had some negative effect on their operations.


Therefore, instead of depending the state’s tax incentive programs, Maryland should consider reducing the state’s corporate income tax rate of 8.25% to 7% in order to attract businesses and jobs to Maryland. This rate reduction would help Maryland businesses compete with businesses in Virginia, where the corporate income tax rate is just 6%.


Expensive targeted subsidy schemes are unfair to the state taxpayers and businesses that don’t qualify, but a broad corporate tax rate reduction would benefit everyone in Maryland. In addition, awarding tax benefits to only select firms leads to economic distortions and allocative inefficiencies, while a lower overall tax burden would help Maryland attract jobs from all different industries.


In addition to tax rate reduction, Maryland should eliminate tax incentives that are costly, but ineffective. One way to do this would be for Maryland to set an annual cap on the amount it can award in tax incentives, and then lower that cap in succeeding years. Iowa uses such a cap — as of 2019, its cap was $170 million. Such a cap would force Maryland lawmakers to eliminate programs that aren’t delivering their values.


Not all of Maryland’s targeted tax breaks are necessarily ineffective and wasteful. But problems occur when the state tries to make up for its unfavorable business climate by offering targeted tax breaks instead of cutting or reforming taxes. Ultimately, the only way for Maryland’s economy to grow in a sustainable fashion is by making the state tax friendly for job creators.


 James Hohman is a director of fiscal policy at the Mackinac Center for Public Policy. Carol Park is a senior policy analyst at the Maryland Public Policy Institute.