Last fall, Colorado officials claimed a $1 billion tax increase was needed to save the state’s public schools. Voters did not approve the tax increase. If officials were telling the truth, one would expect that this year they would be directing every extra budget dollar toward K-12 education.
The Office of Economic Development and International Trade will enjoy a $3.7 million increase. It works closely with the Colorado Economic Development Commission, which awards business grants from the taxpayer-financed “strategic fund.” In August 2013, the Colorado Economic Development Commission approved a $200,000 loan to “small, rural movie theaters that are facing financial pressure.” Given that almost all businesses face financial pressure, it is no wonder a Denver Post study showed nearly one-third of the businesses the commission funded had ceased to exist as independent entities.
Other economic development giveaways include $5 million in special rewards for television and film producers and a $5 million slush fund for the Advanced Industries Accelerator Program. The program benefits people involved with currently fashionable businesses like aerospace, bioscience and electronics.
The problem with taxpayer-funded grants, tax credits and tax exemptions is that one man’s tax preference is often another man’s tax burden. The Governor’s Office says the state needs $24.1 billion to run its government. Yet when favored businesses and individuals receive grants or tax exemptions, the businesses and individuals out of political favor are required to pay more. The state ends up taking money from successful businesses and individuals — money that might have been used to develop successful new enterprises — so it can fund business proposals it thinks might produce tax revenue in a decade or so.
Giving tax deductions for the interest on government bonds but not private ones biases investment decisions in favor of lending to governments rather than private businesses. Providing tax credits to businesses that create 20 new jobs at 110 percent of the county average wage biases the tax system in favor of businesses that hire high-wage employees at the expense of those who hire lower-wage employees.
Worse, such special interest preferences make it almost impossible to maintain a “clean” tax base. Clean tax bases seek to raise revenue while avoiding special preferences for particular types of consumption or investment. They tend to be easier to comply with and understand than ones with tangled labyrinths of special-interest concessions. Simple tax laws with a low general rate often raise more revenue than do complicated laws with a higher general rate and lots of special exemptions.
Lower rates in a simple tax system are also beneficial because they are less likely to trigger wasteful tax avoidance schemes.
As a rule, the political system is incapable of distinguishing legitimate economic arguments from illegitimate ones, and often distorts economic decisions by picking winners and losers on the basis of political power or emotional pleading.
Tax breaks blessing certain special interests at greater cost to the rest of us persist. Meanwhile, lawmakers scarcely have considered a liberating and cost-saving use of tax credits.
The current political practice favoring the consumption of K-12 education via public schools biases educational decisions. Nonprofit scholarship-granting organizations could serve more needy elementary and secondary students with private tuition aid if the organizations’ donors received a tax credit for their contributions. Children leave the public system to receive a quality education. The state comes out ahead because the scholarship costs less than the per-pupil amount for students remaining in public schools.
Colorado citizens already pay plenty of taxes. Before officials come back with additional proposals for tax increases, they should stop expanding the system of special tax rates for special groups and start rolling back existing ones. At the same time, they should look at enacting tax credits that provide a general educational benefit while reducing the expense to taxpayers.
Without reforms, Colorado voters have every reason to continue to say no to new taxes.
Linda Gorman is an economist at the Independence Institute, a free market think tank in Denver.