Supporters of tax credit programs argue that they won’t cost taxpayers a dime, but this is far from the truth. Tax credits are real money, and they do not appear of thin air — they come from the pockets of taxpayers. Even though the recipients of tax credits will pay less in taxes, everybody else will have to pay higher taxes.
Think of it this way: When the state gives a company tax credits, that company won’t be paying those taxes. This means that less revenues will flow to the state Treasury. The government therefore has fewer dollars to pay for schools, fix roads, and build bridges. Unless every tax credit is offset by real spending cuts of the same amount, every dollar that the government spends on tax credits has to be raised through higher taxes or debt. It means that everybody other than the tax credit recipient is getting less and paying more.
I’ve said it before, and I will say it again: There is no such thing as a free lunch. It’s a basic economic principle that’s too often overlooked. Nothing is ever free. Somebody has to pay it. And, in tax credit programs, that somebody is taxpayers.
One way in which Missouri would pay for this program is through lost activity in the private sector. This is a concept that economists refer to as crowding out. If the China Hub proposal passes, then the average Missourian would pay $80 more in taxes, which means that he has $80 less to spend on himself. On average, a family of four in Missouri would pay $320 (that’s a car payment!). If Missourians were able to keep more of their earnings, they would eat at more restaurants, spend more nights in hotels, buy a newer car, make upgrades to their home, etc. When their taxes increase, they inevitably scale back their spending and this economic activity is lost.
If tax credits generate economic activity, they do so only at the expense of other forms of economic activity.
[Earlier this morning, Audrey Spalding and I talked about the proposed China Hub with McGraw Milhaven on The Big 550, KTRS. I encourage our blog readers to check out the audio archive of the interview.]
