Backgrounder: Repealing the Business Tax

April 26, 2018

by Jason Arp

Earlier this month, a group of Indiana businessmen, government officials and think-tank members were fortunate enough to host perhaps the state’s most preeminent economist. Dr. Barry Keating is a professor of economics and business analytics at the University of Notre Dame where he is the past chair of the Department of Finance. Dr. Keating was a protégé at Virginia Tech of Nobel Laureate James Buchanan and Gordon Tullock, founders of the school of Public Choice economics.

Dr. Keating’s presentation on tax abatements in Fort Wayne revealed what students of Public Choice economics already knew: targeted economic-development projects only benefit the select few that are directly involved in the construction, financing or lobbying of the venture, while the taxpayer ends up holding the bag. And many times this is a deflated, tattered, foreclosed-upon bag.

In coming weeks, my city council will have an opportunity to apply the knowledge of Keating and the Public Choice economists at least in a general way. A resolution will be introduced to exempt all new business equipment from property taxes, thus eliminating the need for abatements in most cases, leveling the playing field and eradicating most of the opportunity for “rent-seeking” activities that economists tell us can cost a mid-sized city tens of millions of dollars a year.

Keating cited three specific instances that I believe support such an exemption:

1. The first is how Jerry Brown, of all people, saved California from insolvency in 2011 by jettisoning Tax Increment Financing and the concomitant Redevelopment Authorities. California public schools, police and fire departments were struggling because so much of the growing economic areas that would have provided the tax base had been captured in TIF districts. These redevelopment commissions continually attracted projects that required public financing to get off the ground. Using TIF to pay for bonds for these politically chosen projects not only choked public services but warded off private investors that could have created new ventures that could have become self-sustaining and contributed to the general tax base.

2. The next is the College Football Hall of Fame. Constructed in 1996, estimates were for it to draw 150,000 visitors a year to a “renovated” downtown South Bend. When only half of those visitors materialized, it’s continued operation became untenable and it closed its doors in 2012, moving to Atlanta where it had private sponsorship. This white elephant left the city of South Bend in the lurch, bond payments persisting as it sits vacant six years later.

3. The final example is Elkhart, where in 2009 with 20 percent local unemployment, Barack Obama announced a new industry of manufacturing electric cars. $50 million dollars of government money was poured into the project, resulting in the formation of three companies, all of which later folded. Today, according to Dr. Keating, unemployment in Elkhart is nearly 0 percent, but not because of the government program. No, only two electric cars were ever produced.

This returns us to Keating’s roots: Public Choice economics is applied to governments and nonprofits where investment decisions are not made by straightforward profit motives but by political calculation. Here we venture into the question of what it is that governments ​should​ do.

Keating listed three categories, originally formulated by Milton Friedman:

When governments grant monopolies, they step outside of these bounds. Tax abatement, TIF and other forms of individualized incentives or subsidies qualify as monopolizing particular resources (land, tax dollars, financing or just opportunity) in a given economic-development area.

This granting of monopoly always is accompanied by the age-old profession of rent-seeking (using the government to distribute income in one’s own favor). This is accomplished through political means. The more discretion the government has, the more opportunities for rent-seeking behavior.

In summary, Keating introduced a novel idea: Auction off the incentives or monopolies in the same way the Federal Communications Commission (FCC) auctions off broadband frequency. This has been a successful model for some time, but the interesting thing about it is that the most innovative and productive bandwidth of the last 20 years is the one that the government decided was so useless it should be given away — Wi-Fi.

Maybe there is a lesson to be learned in that fact alone.

Jason Arp, for nine years a trader in mortgaged-backed securities for Bank of America, represents the 4th District on the Fort Wayne City Council. He wrote this for the Fort Wayne Journal Gazette.


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