Few people enjoy paying taxes. Most taxpayers can take solace in the fact that, despite inevitable government inefficiencies and boondoggles, at least some of their taxes are going to pay for necessary services. But what if you had to pay those taxes to your employer instead?
Some Americans already are, and, depending on where Amazon’s “HQ2” ends up, many more could as well. It’s known as a personal income tax (PIT) diversion, and it adds insult to injury when it comes to targeted tax breaks for corporations — also known as corporate welfare. PIT diversions can work several different ways, but the end result is the same: some or all of taxes paid by a business’s employees go into the coffers of the business, not the state government. Employees must pay the same amount in taxes as before, just with the knowledge that part of their paychecks are going straight back to the people who wrote them.
This practice is not particularly new. A 2012 report by corporate welfare tracker Good Jobs First identified 16 states with PIT diversion programs. In total, these programs accounted for nearly $700 million in tax diversion that year alone.
Amazon’s HQ2 has the potential to expand the scope of PIT diversions significantly. Chicago, for instance, is offering Amazon $1.32 billion in PIT diversions if Amazon chooses to locate its new headquarters in the city. Under Chicago’s proposal, Amazon would receive 50 percent of the tax payments of its employees over the following 17 years. Amazon would also receive around $700 million in other tax breaks, and Chicago would pledge to spend $250 million on workforce training for Amazon employees. It’s likely not a coincidence that Chicago made it onto the shortlist of twenty cities that Amazon recently released.
Of course, Chicago leaders have been touting the proposal as an opportunity for growth. But targeted tax incentives like this one are not a winning economic proposition. Instead, they are part of a growing trend towards competition between states and localities resulting in policies that encourage rent-seeking, not growth. “Economic development programs” that offer special tax breaks to relocating businesses are often deemed crucial spurs to economic growth by local politicians. In practice, however, they create significant market distortions in return for dubious benefits.
Targeted tax incentives are a classic example of duplicitous policy. They get credited for positive outcomes that are only tangentially related, while their negative impacts are difficult to trace back to the policy that caused them. Studies have found that as many as nine out of 10 hiring or investment decisions that followed targeted tax breaks would have been made anyway, though the subsidies tend to get credit for all new jobs created. Many factors go into a business’s decision about where to locate; often, tax breaks are just an added bonus on top of a decision that was already made.
At the same time, targeted subsidies harm competition. Claiming tax breaks unavailable to local competitors, a politically supported business is often able to control an artificially large chunk of the market. One Louisiana study found that as many as 90 percent of the economic benefits of targeted tax breaks were offset by resulting layoffs and closings among local businesses.
The tax breaks offered to Amazon are the epitome of corporate welfare. Large businesses like Amazon have much more to offer than smaller businesses, and so they receive a disproportionate share of economic “incentives.” Despite the evident drawbacks, the general public remains broadly supportive of local tax breaks for Amazon in return for jobs.
But no matter how much people appreciate their jobs, no one wants to pay taxes to their boss. PIT diversions may be an ingenious form of corporate welfare, but they are bad policy. Chicago and other cities considering offering Amazon their own employees’ taxes in return for HQ2 should find ways to entice Amazon that do not harm taxpayers.
Andrew Wilford is an Associate Policy Analyst with the National Taxpayers Union Foundation. Follow him on Twitter @PolicyWilford.