ON-Lion Letter

Never-before-seen data in a groundbreaking July report unveils the unequal tax treatment of businesses and individuals by state governments and provides specific state data on tax carve-outs.  From the Center for State Fiscal Reform (CSFR) of the American Legislative Exchange Council (ALEC) in Arlington, Va., the report shines a light on state government favoritism or “targeted growth” through the use of tax carve-outs and other incentives to attract taxpayers to a specific state.  The favoritism employed by state governments creates unfair tax codes and leads to a system the authors call “tax cronyism.”

“State governments should not be in the business of picking winners and losers through their tax codes,” according to report co-author Jonathan Williams, who directs CSFR -- which is supported by Milwaukee's Lynde and Harry Bradley Foundation.  “Instead of engaging in tax cronyism, which creates a system that caters to government-favored businesses and individuals while pushing out the others that do not receive special treatment, policy makers should strive to create a competitive tax system for all businesses.”

State tax expenditure reports, which vary widely, reveal the distortionary methods employed by state governments to attract businesses to their states.  In the most-recent year in which each state published their respective tax-expenditure reports, the sum of tax carve-outs was $228 billion for personal income and businesses earnings tax exemptions and $260.1 billion in sales tax exemptions.

The amount each state reported in tax carve-outs and the number of businesses and individuals that benefited from those carve-outs is available online.

“The report provides state-by-state data that had not previously been assembled, and data collection was a challenge due to major transparency issues in state reporting of tax preferences.  As a result, our report calls on states to improve their data reporting and provides concrete steps to achieve transparency,” said report co-author and CSFR research analyst William Freeland.

The report finds that states that use tax carve-outs to improve the state’s economy rarely meet their goals for economic growth.  It also includes proposals to help end tax cronyism.

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