California gives corporations billions of dollars in special tax breaks each year on the assumption they will generate more job-creating investment.
However, state officials only occasionally check to see if these loopholes actually do what they are supposed to do, or just fatten corporate treasuries. In fact, a nationwide study of how states manage “incentives” says California’s oversight is one of the weakest.
“California is trailing other states because it has not adopted a plan for regular evaluation of tax incentives,” Pew Charitable Trusts concludes in its state-by-state examination. Pew’s criticism mirrors what the Legislature’s own analysts and auditors have said.
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Last year, for instance, State Auditor Elaine Howle told lawmakers that in reviewing the state’s six largest corporate tax breaks, totaling $2.6 billion a year, her staff could not make any judgment about the largest of them, a $1.5 billion corporate tax credit for “research and development.”
That, she said, is because “a lack of oversight or evaluation has resulted in insufficient evidence” to say whether it and another smaller tax break “are fulfilling their purposes.”
Howle and others call such tax breaks “tax expenditures” because they have the same fiscal effect – money leaving the state treasury – as budgeted spending but do not receive the same scrutiny.
Gov. Jerry Brown’s proposed 2017-18 state budget lists $122.5 billion in general fund spending. The $2.6 billion in corporate tax breaks, totaling as much as the state spends on natural resource protection, are not included.
The state’s most recent excursion in corporate subsidies is an expanded tax credit for film production – an effort to slow the flight of what was once a California-centric industry to other states and nations.
Three years ago, the credit was expanded from $100 million to $330 million a year, and the film industry and its friendly politicians have touted anecdotal accounts of its supposedly beneficial impacts.
Unlike other major tax breaks, the film credit does carry a requirement for evaluation after a few years, but the Legislature’s budget analyst, Mac Taylor, has advised his bosses that trying to compete with other states on film production and other activities is “very problematic as a public policy” and difficult to analyze from a cause-and-effect standpoint.
The Pew report is not all negative about California. It cites the planned evaluation of the film tax credit and also notes that when one big subsidy, a $750 million per year tax break for business locating in “enterprise zones,” proved to be an abject and counterproductive failure, the Legislature and the governor eliminated it.
However, such evaluations should not be whims of the moment but rather built into the budget process, just as other expenditures are weighed.
If taxpayers are handing out billions of dollars in corporate subsidies each year, recipients should be required to prove that they are worth it. Otherwise, they’re just welfare for the wealthy.