Corporate Giveaways and Tax Expenditures: An Examination

As the legislature continues to examine Governor Deal’s proposed 2016 state budget and the Transportation Committees in the House and Senate try to figure out how to raise more than a billion dollars to maintain the state’s roads and bridges, there is a parallel discussion about eliminating waste, fraud and abuse, along with corporate giveaways. And while much of that discussion involves taking a line-by-line look at the budget, a related but less noticed area of examination is of the so-called tax expenditures the state makes each year.

What’s a tax expenditure?

Tax expenditures are provisions in the tax code that allow for special treatment of a source of income or a certain type of expense. Such treatment usually results in a reduction in tax liability for the taxpayer. In principle, these tax benefits could be provided by direct appropriation, thus these provisions are referred to as “expenditures”. They represent tax revenues that would have been otherwise generated if not for this preferential treatment in the tax code.

Like direct government expenditures, tax expenditures are an allocation of government revenue that are intended to achieve a particular policy outcome or generate some activity. The value of a tax expenditure can be thought of as representing the amount of money that would be needed in the budget to provide the same level of financial support in the form of a government grant instead of through the tax code. Tax expenditures are received by businesses and individual taxpayers and are present in all of Georgia’s major taxes, including the individual income tax, corporate income tax, and sales tax.

That description comes from the Georgia Tax Expenditure Report for FY2015. The report goes into considerable detail in its listing of tax revenue lost to the state via exemptions and deductions in the personal and corporate income taxes, the state sales tax, and several other smaller excise or special purpose taxes.

There is a lot of foregone revenue simply because the state largely uses the same exemptions and deductions individual taxpayers receive on their federal 1040 tax returns. The deduction for employer paid healthcare is just over $1 billion. Another $199 million comes from the exclusion of capital gains upon the sale of a primary residence. Eliminating just three deductions taken from Schedule A–property tax paid, mortgage interest, and charitable contributions–could provide the $1 billion seen as a floor for additional spending on transportation. Yet, it’s unlikely politicians will modify the exclusions and deductions the federal government sees fit to impose. The same thing is true for similar exclusions and deductions from the federal corporate income tax.

Let’s look at some state level credits and exemptions from income taxes. I was able to identify $318 million in income tax credits related to job creation. Each one has an individual and a corporate component. The largest is the film tax credit, at $163 million. The employer’s job tax credit is $74 million, the manufacturer’s investment tax credit is $65 million, the quality jobs tax credit is $9 million, and the research tax credit is $7 million. Altogether, they add up to $318 million, yet the economic effects of just the film industry is over $5.1 billion. Many would say that’s a pretty good return on investment.

The final major area where the state gives up revenue in tax expenditures is exempting certain items from sales tax. Many of these exemptions are very narrowly targeted, and as a result have less than a million dollar effect, such as “sales to Georgia Society of the Daughters of the American Revolution” (who knew?) or “sales of pipe organs or steeple bells to any church qualifying as a nonprofit.” Some, like the $22 million for “partial sales tax exemption for jet fuel sold to or used by a qualifying airline at a qualifying airport” have drawn the attention of activists and some lawmakers, while the larger $30 million exemption for “Sales of fuel or consumable supplies used by ships engaged in inter-coastal or foreign commerce” flies under the radar. There are big items, like the exemption for food and drugs, totaling $900 million. And Governor Deal has regularly touted removing the sales tax on energy as a way of attracting manufacturing jobs to the Peach State. That combined with no sales tax on manufacturing equipment, materials, and supplies is worth $3.09 billion.

Finally, there is the $4.798 billion in tax revenue forgiven because the state does not tax services. That’s something FairTax proponents might want to keep in mind.

There is a lot of tax policy to consider when looking at the report, and each person will have his or her own opinion of what constitutes a needed tax expenditure. But, for those who think changes should be made, Grover Norquist, the guy who opposes HB 170 as a tax increase would also say that removing any of these tax expenditures is a tax increase, and would require a reduction in taxes elsewhere.

19 comments

  1. saltycracker says:

    Reads like if the state ran with a 1% sales tax on all monetized transactions, including internet and services, rare exceptions like savings/retirement accounts, the revenue would increase and the collection costs decrease. Scrap the corporate income tax. Flatten an all inclusive income tax and let the county/city do what the locals will go for in sales tax.

    But since our rep/tax code will get us a better deal and he will be able to fund reelection thanks to the super complexity, never mind.

    • Charlie says:

      The state already taxes internet sales.

      The question I keep asking the Georgia FairTaxers is, how exactly are you going to quantify and collect a lot of these items that are imputed but aren’t necessarily easy to quantify and/or attach, and therefore collect?

      • saltycracker says:

        C
        Wouldn’t think you support the current convoluted, complex mess. Dont think you’d support some big % “fair” number catch all.

        I prefer my peanut butter spread thin over the entire piece of bread. Understanding that a short list of exemptions that apply to all is reasonable – investments,health care or whatever is agreed to fail an acid test of reasonable.

        You are a bit closer to the camp fire so read us a story and toss some pearls.

        • Charlie says:

          Perhaps your assumption that adding all these new “services” and other things that can’t be specifically identified/attached/collected makes it simpler, rather than more convoluted and more complex, is where you lose me.

          I’m in favor of taxes that are flat and broad based. When you start calling “income” a “service” and pretend that swapping a 6% income tax for a 7.5% or more sales tax is savings and/or an economic stimulus then we’re at fantasy.

          Let’s start with the very simple one: Internet sales. The state ALREADY taxes those. It just can’t collect them unless the parties have domiciled in Georgia. So we can calculate this amount all we want and compute numbers showing we’ve broadened the base. Until we figure out how we can actually collect them, however, it’s all just an academic exercise.

          • saltycracker says:

            Didn’t mean to confuse sales taxes with income taxes nor even propose numbers at 6-7.5%. More like a combined half of that when spread out and loopholes closed.

            From what I’ve read algorithms and apps are out there to account and pay sales taxes to every variable percentage of every govt agency in the US. Nothing really changes for the non-compliant except that at a low tax percentage, and equal application, tax evasion is not so socially acceptable.

            • saltycracker says:

              I understand your point of not budgeting items we have no ability to collect – we can only work toward the bills to get this done. But there remains enough we can do to collect more revenue from a broader base at less %, IMO.

              • Charlie says:

                If you tax a “service” as a sale, you are taxing income.

                Draw out the supply demand curve for a hairdresser. Then draw out the effect of an income tax. Then draw out the effect of a sales tax.

                Guess what? If the rate is the same, you have the exact same graph.

                That’s my point. The FairTaxers have no understanding of the economics of their plan, that was designed when the US was still a predominantly manufacturing based economy. It is completely disingenuous and/or ignorant to suggest that switching taxes on services from income to a sales tax has an economic distinction, much less that doing so would create some huge economic benefit.

                Pretending that same hairdresser has 30% embedded costs of complying with tax laws is equally disingenuous and/or ignorant.

                I will now sit and wait for one of the cult members to drop by, read the above without understanding a word of it, and then suggest I “read the book”.

  2. Many of the tax expenditures listed under sales tax exemptions are business inputs, which most all economists agree should not be subject to the sales tax. Even excluding business inputs, the sales tax base could be more than doubled and the rate lowered from 4% to around 1.7% without losing any revenue (http://www.georgiapolicy.org/the-economics-and-politics-of-tax-reform/). An expansion of the sales tax base to consumer services taxed in 25 or more states (recommended in 2012 by the Tax Reform council) would more than offset the loss of revenue from exempting motor fuel from local sales taxes as currently proposed in the Transportation Funding Act.

    Charlie is correct. After some basic consumer services it is politically difficult (taxing health care, home purchases, etc.) and administratively difficult (financial services, for example, which can be easily shifted to other states).

  3. saltycracker says:

    I’m going to go get a beer….My points were not about fair taxes. In my shot at the mess the idea would be the hairdresser charges us 1% tax on $10o0 services to remit and in turn pays 1% tax on $1000 in income – the state gets 2% or whatever the sum is, could be 2%@. Bit more complex if the hairdresser is an employee of a corporation. Lots of numbers to run to settle at the right rate, applications and if corporate taxes can be eliminated.

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