According to economist Timothy J. Bartik—the first person quoted in the series, and a critic of many incentive programs—it was a questionable decision. In a blog post focused on his home state of Michigan, Bartik noted that of the $6.65 billion in business incentives the Times identified, the majority—about $4.80 billion—came in the form of sales tax exemptions for business services and manufacturing inputs. But lumping these policies in with handouts and special deals to companies is a mistake, Bartik writes:
Most public finance economists would agree that the sales tax should NOT be applied to business purchase of inputs, whether they are goods or services. Why? If we apply the sales tax to business purchase of inputs, this discriminates in favor of vertically integrated firms, and against firm’s contracting out to have some of their needed inputs be produced by other firms. A firm that purchases inputs from some supplier, which may in turn purchase inputs from other suppliers, will find that the sales tax pyramids with each level of additional purchase. A firm can reduce its sales tax bill by acquiring its supplier, that is by “vertically integrating.” There is no public policy rationale for encouraging such vertical integration.
Bartik elaborated on the theme here. A similar point was made by Tax Analysts executive editor David Brunori, who called the inclusion of sales tax exemptions a “serious flaw” in an otherwise “terrific set of articles.” (Disclosure: I am a columnist for Tax Analysts.)
And more praise and criticism came from Professor Kenneth Thomas, an author of two books on corporate subsidies, who was interviewed (but not quoted) by the Times. In a pair of blog posts, Thomas praised the series for creating “substantial buzz about the issue of economic development subsidies,” and lauded the paper “for compiling a great database of programs all in one place.”
But, Thomas added, tax exemptions for business services should be thought of as “methods to avoid tax cascading… and not a subsidy at all.” And the Times’s “interpretation of the sales tax breaks, which are 5/8 of the national total but largely not subsidies, confuses the issue of total impact on state and local budgets and makes statistical analysis premature.” (For a more particular complaint about the paper’s characterization of the impact of a subsidy on a local budget, which the Times disputes, see here.)
As these commentators acknowledged, people can disagree about what counts as a “subsidy.” And the Times does have some support for its decision. Purdy wrote to me via email that “Michigan’s in-house tax expert, who is also a professor, advised Louise to include sales tax figures that he said reflected subsidies to businesses.” Also, after the Times series kicked off a debate on this very question in West Virginia, a policy analyst at a left-leaning think tank there weighed the issue and concluded, “the [sales tax] exemption meets all the definition of a tax incentive.”
Still, the Times’s decision to include the sales tax exemptions was at odds with leading authorities on this subject—and worse, lay readers and most journalists would come away from the series not even knowing of the debate. A news organization does not have to report in conformance with orthodoxy. But journalists should be aware of orthodoxy, be ready to explain it, and also explain the reasons a different perspective adds valuable insights.
$100 million, and more
The paper emphasized in the series itself and in communication with me that its numbers were not comprehensive. Journalists who hope to build off the paper’s work should take that disclaimer seriously.
This point can be seen most clearly in the user-friendly database accompanying the series, which was compiled by blending the Times’s original reporting with several existing data sources. (The online Subsidy Tracker from Good Jobs First accounted for some 98 percent of the individual company awards, and a smaller share of the money awarded, in the Times’s database.) One feature of the database is the “$100 Million Club”—the 48 companies the Times identified that received at least $100 million in state grants since 2007.
correcting typo
David’s article says: sales tax relief accounts for “around $52 million of the overall $80 billion in incentives.”
Louise”s story actually says:
“The income tax breaks add up to $18 billion and sales tax relief around $52 BILLION of the overall $80 billion in incentives.“
#1 Posted by Bill Du Bois, CJR on Tue 29 Jan 2013 at 05:38 PM
Thanks, Bill. We will get that m turned into a b.
#2 Posted by David Cay Johnston, CJR on Tue 29 Jan 2013 at 05:41 PM
Thanks for the pointer, Bill, and apologies to readers for the typo. It's corrected now.
#3 Posted by Greg Marx, CJR on Tue 29 Jan 2013 at 05:48 PM
The NYT authors did not consult with any sales tax authorities in deciding what ought to be considered subsidies through the state sales taxes. Sloppy work done by NYT on an important topic. Too bad an opportunity for sound tax policy got blown.
#4 Posted by Mike, CJR on Wed 30 Jan 2013 at 03:50 PM
In a world where Republican dominated state governments are discussing eliminating all income taxes in favor of revenue from sales taxes, sales tax breaks as incentives must be accounted for, IMO.
#5 Posted by Jim Satterfield, CJR on Wed 30 Jan 2013 at 11:45 PM
Nice corrective, Mr. Johnston. Thank you. Good to see Good Jobs First get some credit too.
On the sales tax issue, I think of it this way: if the law says you have to pay the tax, and the legislature gives you an exemption, then its a tax break.
It might be good policy to avoid creating "cascading tax" payments for some companies while allowing vertically integrated firms to avoid them. But it might not be. After all, these days we're told it's all about keeping one's head count under 49, to avoid "Obamacare." (And while this is probably a bad business strategy, long-term, it has currency among small business folk). So one could argue that tax policies that encourage larger firm formation generally--if not vertical integration specifically--might be good. Good for workers, anyway, who tend to make better wages and benefits if they work for bigger companies.
Just sayin'.
#6 Posted by Edward Ericson Jr., CJR on Thu 31 Jan 2013 at 12:10 PM
The arguments used about sales taxes for business are just as applicable for sales tax for individuals - if sales taxes discourage someone from purchasing from another, that's an economic distortion which is bad for the economy.
I'm all in favor of eliminating sales taxes altogether, but that doesn't change the basic message that sales tax waivers targeted to a particular corporation are a gift to that corporation.
The point of the NYT series is to expose cases in which those can afford lobbyists are taking benefits from those who can't. Sales tax is deservedly part of that picture.
#7 Posted by Geoff, CJR on Fri 1 Feb 2013 at 12:28 PM