Two noted economics professors at separate Ohio universities expressed different levels of concern about the use of tax deductions, exemptions and credits – also known as tax expenditures – to attract capital investment and jobs to the state. One was openly opposed to them on the grounds that they violate the tax principle of economic neutrality and result in government picking winners & losers rather than a functioning, free market. The other viewed tax expenditures as just another way to accomplish and fund a legislatively approved purpose without having to go through the state budget’s appropriation process.
In testimony before the Senate Ways & Means & Economic Development Committee, Professor Richard Vedder of Ohio University first outlined the attributes of a good tax – those being simplicity/uniformity, fairness/equity, transparency, and economic neutrality. He then said tax expenditures are deviations from uniformity and simplicity involving de facto substitution of varying effective rates of taxation in an administratively costly manner. He believes the benefits of tax expenditures are somewhat over-stated and their continued existence impedes economic growth because their relationship to lowering overall tax rates is not understood by the public.
On the other hand, Professor Ned Hill of Cleveland State University recognized it is the nature of the beast that tax expenditures will accumulate in any state’s tax code as economic development deals are struck. Most of his concerns were related to the state’s ability to verify the actual impact of the tax expenditure – for example, does it generate other tax revenues to indirectly pay for itself? Should the tax expenditure be treated as a state investment and, if so, how should the return-on-investment be measured?