How Tax Credits Built the “Good Ol’ Boys’ System”
Ask any American about the core problems with government, and you’re sure to hear stories of the “good ol’ boys’ club”. That group that tosses good bills, sneaks in bad pork, and generally twists the arm of government into making themselves even richer. It’s no secret that nearly everyone has a problem with this group, in whatever form they take depending on political preferences. From stories about the 1% to worries about a deep state, it seems most people take for granted that someone is actively cheating them through their government. For better or worse, society’s villains prefer to cheat and steal from the shadows. The question then becomes, if we all know someone is cheating, why do we keep allowing them to rig the game via hot-air filled propositions like corporate tax credits?
For as long as you or I have been alive, West Virginia has tried to incentivize job creators to set up shop via some form of corporate tax credit. Despite many of these attempts, we are still near the bottom in economic outcomes, and yet we continue playing a game that we could never hope to win. Let’s face it: even if tax credits could bring prosperity (which the data doesn’t support), other states around us simply have more capacity for these things. In what world can West Virginia compete with Ohio or Maryland in direct financial incentives? You might as well ask the Mountaineers to play the Chiefs! The resource and population factors simply make us the weakest regional player in the silly game of tax incentives.
The other end of the tax credit issue doesn’t need nearly so much rational assessment. Whether or not a single job is created, the real winners with tax credits are politicians and their friends. Tax credits might be an impotent economic tool, but they more than make up for their economic ineffectiveness in their role as political tools. If you actually compete in a market and please 10,000 people, you might still lose money; if you compete enough to just make a handful of politicians happy, your returns are much more secure. In this way they allow some people to always come out ahead, or at least to have a significant head start in the market. In simple terms, they’re picking winners and losers in advance. It is analogous to playing poker with x-ray goggles; you could still lose, but it would take some serious effort. Tax credits essentially turn the taxpayers of West Virginia into unwilling investors in politically hip businesses.
This isn’t to say we can’t offer businesses good reasons to come here – we can. We just need to ground them in sound economic principles. Let’s find solutions that have lasted for centuries, not just months. Principles like open competition and consumer choice have lifted generations of people out of poverty all over the world. These principles are also an antidote to good ol’ boys’ clubs everywhere since they rely on merit and results, not handouts and insider baseball.
In place of a complicated corporate welfare scheme, we need a simple and fair tax code. A tax code that doesn’t get too convoluted enables small businesses to rise faster. Even when complicated tax codes and credits are “fair,” small businesses simply have fewer resources to invest in checking their p’s and q’s. This means that they end up doing more tax work annually than their larger competitors, which translates to making less money, and ultimately hiring fewer workers.
Yet another strategy that enables the little guy is the regulatory sandbox. A regulatory sandbox is a regulatory structure that allows for firms in certain industries that meet legal requirements to act free of considerable levels of regulation. Obviously, many regulations and rules would apply, but such a system allows regulations to be suspended in exchange for close monitoring from regulators. In short, some industries would be allowed to help test where regulations might be needed, thereby reducing the regulatory burden and making West Virginia much more competitive. Instead of throwing money at the problem, we can enable our own ingenuity and competitiveness to develop our economy. We already have a small fintech sandbox, and we should seek to expand our program when possible.
George Carlin once said that “It’s a big old club and you ain’t in it,” and that perfectly sums up the reality of our crony corporatist tax policy. We use old policy designs to make the well-connected richer in the name of helping the poor and middle class. Instead of enabling the people who are good at playing political games, let’s enable people who can play the entrepreneurial game. By moving beyond outdated policy and utilizing simple tax policy and revolutionary regulatory policy, we can make West Virginia work for everyone.
Let’s seek strategies that put everyone on an equal playing field economically, no matter the hilltop or holler they come from.
Bradley Foster is the Community Engagement Associate for the Cardinal Institute for WV Policy.