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Adrian Moore, Vice President of Reason Foundation

February 1, 2013

[Publisher's Note: We are pleased to present this thoughtful piece by Adrian Moore of the Reason Foundation. - Flash]

If you are new to the FlashReport, please check out the main site and the acclaimed FlashReport Weblog on California politics.

Gov. Brown's claim to have a balanced budget proposal that eliminates the deficit has been exposed for the fabrication it is (see my contribution here).  His budget commits another fiscal sin as well--refusing to base funding on success or failure in the past.

Sacramento creates projects and programs every year, funds them in the budget, then never looks back. Never assesses if they are working or not, or if the money is actually well spent.  But we all know Sacramento pols care nothing about taxpayer's money other than spending it.

A new study by Reason Foundation and the Howard Jarvis Taxpayers Foundation examines California's practice of giving tax credits to favored industries and companies and the ill effects it has on the state economy.  For decades Sacramento has been picking and choosing industries to subsidize with tax credits, with Hollywood a long time beneficiary, and "green power" one of the hottest new tickets. 

Now, all states, to some extent, use their tax codes to advance specific policies. Those various policies can be reflected in differing tax rates on individuals, businesses or activities. In addition, tax forebearance, or “tax breaks,” can be used to advance policies thought to be beneficial. The scandal that erupted when Fremont, CA-based solar cell manufacturer Solyndra declared bankruptcy and defaulted on government-backed debt showed how off kilter these policies can get. In addition to the $528 million loss that federal taxpayers took on loan guarantees Solyndra was unable to pay back, the company also received $25 million in California state tax exemptions that ultimately proved to be a waste. This painful lesson did not prevent California's legislature from passing, on the last day of the 2012 legislative session, a two-year, $200 million extension of the state’s film tax credit, however.

Proponents argue that while cases such as Solyndra are unfortunate, they are a necessary evil that must be tolerated since the benefits of governmental “investing” in certain technologies or industries will, in their view, someday outweigh the costs. I'd point out that the government rarely knows what is both certainly beneficial and inadequately funded by the market, but even worse is a lousy investor, giving to well connected companies, not those with the best business plan, and not caring if the investments pay off or not, only the newsbite when the check is written.

The Reason/Howard Jarvis study looks at specific corporation tax and sales and use tax credits, deductions and exemptions in order to evaluate whether they serve their purpose. The argument offered in support of such tax breaks is that they will improve the lives or livelihoods of certain classes of individuals, businesses or industries. But their costs are frequently ignored. While they may encourage business activity in a certain sector of the economy, this comes at an unseen cost, which is the business activity that would otherwise have taken place in other sectors of the economy.

Sacramento needs to face up to the facts on these crony tax credits.  The study shows that their costs are high, indeed if all the special interest tax credits were eliminated, California could likely reduce its overall corporate tax rate by more than 20 percent!

How many jobs might that create by shifting resources from failing companies that have to be propped up to successful ones that make profits and pay taxes?

Adrian Moore, Ph.D., is vice president of research at Reason Foundation, a free market think tank based in Los Angeles.You write write to Dr. Moore, via the FR, here.

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