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Business Observer Friday, Jan. 22, 2016 2 years ago

How business tax cuts really do help the poor

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Gov. Scott's critics say cutting taxes for business ignores average Floridians. They fail to see that businesses don't pay taxes. Lower taxes actually help the average Floridian.
by: Matt Walsh Editor

You know the old joke about the Legislature: Every time it goes into session hold on to your wallet.

In truth, it's safe to say a wide majority of working Floridians, snowbirds and retirees pay little attention to the day-to-day minutiae of the Legislature. For the most part, lawmakers tend to work in the margins and avoid creating big drama that would affect their re-elections.

Only when they start futzing with things like whether you can carry a gun or smoke weed do the masses seem to get stoked and involved.

Even so, in spite of the tepid interest in most legislative sessions, we make a point of tuning to the governor's State of the State address in on the opening day of the Legislature. It often serves as a signal of what will be big over the next 60 days.

To little surprise, Gov. Rick Scott hit his replay button Tuesday and focused on the same three issues that have consumed him for the past six years — jobs, jobs, jobs.

The Capitol press corps and legislative media pundits hate this. They are bored, sick of hearing about jobs. They want conflict.

Nonetheless, regardless of how unpopular he may be, Scott, unlike many politicians, has stuck to his campaign promises and script. It shows a rare understanding and conviction among politicians of the social and economic value of a job, any job.

Specifically, as most of you know, Scott urged lawmakers to take $1 billion of Florida's expected revenue surplus to cut business and other taxes and $250 million of it to create a new trust fund for corporate recruiting. The businesses' tax cuts actually would total $1.18 billion over the next three fiscal years (see box, page 18).

Lawmakers, of course, reacted according to party line — Democrats blowing gaskets, most Republicans expressing caution. None of them ever wants to promise anything on the first day of the legislative session. They know this annual poker game requires them to hold their cards until they have a clearer picture of whether there will be other preferred ways to spend that surplus or give it back to taxpayers via tax cuts.

Predictably, Florida's media pundits and statists responded to Scott's tax-cut request with utter disgust. You know how it goes. They jumped all over him for not focusing on increasing Medicaid and mental-health spending; more spending on schools and the environment; and the usual social laundry list. But they especially teed off on Scott for proposing “corporate welfare” and tax cuts that would help only his favorite special interest: business. There is nothing, they said, for the little people.

On these latter points — tax cuts for the business special interest and none for average Floridians — this is when we wish all of these critics actually would realize that what Scott said in his speech is so, so right (see box below).

This one sentence is especially so: “A job is the No. 1 way to change any person's life for the better ...”

A few weeks ago, we noted this same point, quoting Arthur Brooks, president of the American Enterprise Institute and a scholar on social entrepreneurship. Brooks has found through research that having and succeeding at a job is the secret to happiness.

And surely, we would hope, everyone understands, as Scott stated: Government is not the source of wealth.

If, for instance, government commits tax revenue to build bridges or schools or to employ cops or teachers, it has obtained the money to do so by taking it from someone else. Few people — especially millennials and progressives — add two and two. They think government is creating jobs and wealth when it hires bridge builders, cops and teachers. But they forget the other side. The money for those jobs comes from lowering the wealth of the person from whom government confiscates.

What's more, here is a greater point the critics of business tax cuts seldom can see or believe: Businesses do not pay taxes. Individuals do.

The burden of business taxes ultimately always falls on individuals — e.g., in the form of lower wages for employees; lower dividends and return on investment to shareholders; and less available capital for the business owners to reinvest in their companies to grow and create more jobs.

Whenever the statists and progressives howl for more and higher business taxes or against tax cuts for business, they are campaigning for policies that, especially, in the end, hurt the little people most.

Sure, Scott could have done what most governors and presidents do in their State of the State or Union addresses — spouted off a checklist of issues and concerns to please everyone. But when you cut through all of those big government issues, the ones that matter most to the electorate are tied to Abraham Maslow's hierarchy of needs. To achieve happiness, people first want their basic needs met. And the first two are: 1) physiological (food and water); and 2) security (personal and financial).

To accomplish 1 and 2, it most certainly requires most of us to have a job.

Don't dis Gov. Scott. Give him credit for staying focused on what matters most.

Scott's proposed tax cuts
BUSINESS TAX CUTS
• Permanently Eliminate Income Tax on Manufacturing and Retail Businesses — This tax will reduce the cost for businesses in Florida by about $770 million annually.

• Permanently Eliminating the Tax on Manufacturing Machinery and Equipment — This is estimated to reduce the tax liability of Florida's manufacturers by $76.9 million annually beginning in 2017. By permanently eliminating this tax, Florida will be more competitive for manufacturing businesses to start or expand. If no action is taken during the upcoming legislative session, Scott says manufacturers can expect a tax increase.

• Cutting the Tax on Commercial Leases — Florida is the only state that has a sales tax on commercial leases. Scott is proposing to reduce the tax 1% in 2017. This will save Florida businesses $339 million over the next two fiscal years.

THE RECRUITING FUND
• Create the Florida Enterprise Fund, a $250 million trust fund where the dollars will remain untouched in the state treasury until companies under job creation contracts meet their job requirements. This is to avoid having to rely on the Legislature each year to dedicate funding for corporate recruiting and expansion.

• Change the return-on-investment requirement from a minimum 5-to-1 return to, according to Scott: “If a deal over 10 years generates a 10% per year return and the state gets a 100% return on the initial investment, we will do the deal. If it can't make that return for taxpayers, we won't do the deal.”

• Streamline the authorization for the Florida Enterprise Fund by requiring that any deal needing more than $1 million have the approval of the House speaker, Senate president and governor while eliminating the need for special committee meetings.

Corporate welfare dilemma
When Gov. Rick Scott unveiled the details of his $1 billion tax-cut plan and $250 million Florida Enterprise Fund for corporate recruting, one of the reasons he cited for creating this new trust fund was this:

“Meanwhile, our competition for job projects has plenty of funding: New York - $150 million; Texas - $90 million; South Carolina - $58 million; Georgia - $46 million; and Arizona - $20 million.”

That has always been one of the justifications that governors and economic development officials use for offering subsidies to companies that relocate or expand.

To compete, the thinking goes, we must do what everyone else does.

What would Madison, Hamilton and Jay think?

As they lobbied for the Constitution in the Federalist Papers, they and other Founders envisioned the republic being united, yet competing, states. They believed competition — via natural resources, taxation, commerce and economic opportunity — would place a check on profligate state governments and protect liberty.

But over time, as we have witnessed, our elected officials have had a way of distorting the original vision. Madison probably would be sorely disappointed to see how state and local governments have turned the idea of competing states into a contest of which states can offer the biggest taxpayer subsidies to corporations.

It's a perverted system. Multiple economists have shown again and again that subsidies for professional sports teams, stadia and corporations have seldom paid off. Likewise, companies have learned how to pit one state against another to extort the highest tax breaks.

But the late Milton Friedman probably explained the biggest perversion of corporate welfare: To allocate $250 million of taxpayer money into a relocation trust fund is essentially saying state politicians and executives of Enterprise Florida are all smarter and better at allocating capital and creating economic growth than taxpayers themselves. As Friedman said many years ago: Who is to say that the Floridians from whom that $250 million is taken would not create more jobs and economic growth than the state? He argued they could and would.

And then there is this: What is the moral justification of awarding an out-of-state company a subsidy, while so many other homegrown companies have paid state and local taxes for decades and built their enterprises without using a single government dime?

When the governor announced his Florida Enterprise Fund request, he said the state would award incentive money to companies only if the recipient can generate a 100% return on the state's initial investment, plus a 10% per year return over 10 years. Those are great criteria.

Altogether, you can understand Scott's request for the $250 million trust fund — knowing that money will exist from year to year and wanting to be competitive with other states.

But we have always argued that rather than subsidize, creating a great business climate — low taxes, low regulation, safe streets and good schools — is a better formula for economic and job growth.

For most CEOs, those factors are far more important than the size of a subsidy.

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