Economy

‘Duct tape’ economic development

July 9, 2021

Jonathan Small

Business incentives are to state economic growth what baling wire and duct tape are to home repair. Both are less-than-ideal attempts to provide a temporary solution to longer-term problems.

This problem came to the forefront again when state officials announced that Canoo, an electric-vehicle company, will build a manufacturing plant in Pryor—and the company’s CEO told Reuters that $300 million in government incentives played a major role in the decision.

When the government offers incentives, a ratchet effect often occurs between competing sites vying for a business. Legal confidentiality about details of incentive packages can actually help mitigate even higher costs to taxpayers.

While some want to focus on the details of Oklahoma’s incentive package, a far better question to ask is this: Why does Oklahoma have to offer large incentives to lure companies? One reason is the fact that Oklahoma has an income tax—better known as “the penalty on work.” If Oklahoma got rid of its income tax, the state would be far more attractive to many businesses and investors—regardless of incentives.

National data bolster that argument.

The website How Money Walks uses IRS data to track the movement of income between states. It shows a marked difference between states with high income-tax rates and those with no income-tax rates.

From 1992 to 2018, high-tax California lost $73.52 billion in annual adjusted gross income (AGI) as earners fled that state. The top two destination states for departing Californians were Nevada and Texas while Washington was the fifth-most common destination. Those three states have no income tax.

Similarly, New York lost $120 billion in AGI with Florida, which has no income tax, the most common destination.

In contrast, Texas gained $53 billion thanks in large part to earners fleeing California, New York, and Illinois. Florida gained $187 billion. Tennessee, which also levies no tax on wages, gained $17.68 billion in AGI.

You may not think of Wyoming as a destination state, but thanks in part to its lack of an income tax, Wyoming has gained $2.3 billion in annual AGI.

Oklahoma is among the states that have lost AGI. Texas and Florida are the top two destinations for former Oklahomans, representing billions lost from Oklahoma.

Another factor is education. Prompted by school leaders, Oklahoma lawmakers watered down a third-grade reading law that previously fueled strong gains in literacy. Now the state is again a national laggard.

In contrast, a coalition of business and civic organizations in Fort Worth, Texas is working to ensure 100 percent of local third-graders are reading on grade level.

When it comes to growing the economy and attracting investment, policy matters.

To supercharge Oklahoma’s economic engine, officials should repeal the state income tax and get serious about education reform, including school choice. Because an economic engine held together by duct tape (incentive packages) is no substitute for the real thing.