The Blue States’ Economic Paradox

Blue states have a problem. Although there are some recently notable exceptions, most vehemently oppose cutting taxes, favoring instead a tax-and-spend or top-down redistribution approach. They require high taxes to finance the pet projects they believe the market is too short-sighted to support, like Solyndra. At the same time, however, these big government states try to pursue goals of economic growth, even if they believe the best way to achieve growth is through central economic planning rather than free markets.

Overwhelming economic evidence demonstrates that the best way to achieve robust economic growth is when citizens are able to save, invest and spend more of their own money—meaning they pay lower taxes.

Big government states find themselves in a conundrum: if they want economic growth, the best way to attain it is to reduce the state’s tax burden, which jeopardizes their grand plans and programs.

In an apparent attempt to reconcile these competing goals, some left-leaning states have attempted to “direct” this economic growth by cutting some taxes under specific, government-approved guidelines for favored industries. This is done by primarily creating specific tax carve-outs in the tax code that exempt some businesses or industries from the normal rules by which everyone else must play. This practice is known as tax cronyism.

Since reporting requirements vary between states, it is difficult to get a handle on the exact extent to which tax cronyism occurs at the state level, but by adding together the best and most recent data available from the states, a clear, if imperfect, estimate is possible.

Using this data, the sum of state tax carve-outs is as much as $228 billion for personal income and business earnings tax exemptions and $260.1 billion in sales tax exemptions.

It is both wrong and inefficient for government to pick winners and losers in the marketplace, especially when tax policy is the tool used to accomplish these nefarious ends. Playing favorites gives some businesses an artificial advantage over others, forces everyone else who pays taxes to pay even more to make up for these crony carve-outs and opens the door to corruption. But despite all these problems with tax cronyism, the real issue is that the irony of this approach is lost on some of its most ardent supporters.

It is worth noting that …read more    

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