By Will Freeland

Tax cronyism is the subversion of sound, pro-growth tax policy—away from universal and uniform applicability to all taxpayers and towards the interests of the politically favored and connected.

These sorts of tax provisions create competitive disadvantages in markets and massive economic distortions. They foster uncompetitive tax policy and and enable “quid pro quo” corruption.

Regrettably, Oklahoma is plagued by tax cronyism, which is the fruit of a rotten and failed ideology: economic central planning. The remedy is simple. Over the long term, policymakers should aim to end tax cronyism in all its forms. In the short term, they should increase transparency and accountability, thereby letting sunlight disinfect this rotten policy regime.

Tax reforms that unleash the creative potential of mankind by easing the burden of government on all productive, industrious economic activity are anything but narrow, unjust, unearned economic privilege. Tax cronyism, on the other hand, tends to favor the big, old, and sluggish “incumbent” firms for benefit.

Tomorrow’s titans of innovation and engines of economic growth are today’s faceless dreamers working 90-plus hours a week in some garage or basement, barely making ends meet, lacking a spare minute or dollar to spend convincing the political class to cut them a break. Sound, pro-growth tax policy targets the dreamers inventing the future, not those clinging to their share of the past.

A 2014 report from the American Legislative Exchange Council (ALEC), “The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth,” provided the first comprehensive state-by-state count of tax carve-outs. According to the Oklahoma Tax Commission’s “Tax Expenditure Report” for the 2012 fiscal year, Oklahoma carved out more than $1.565 billion from income taxes on individuals and businesses.

Moreover, this only includes Oklahoma state-specific carve-outs and not those carve-outs codified in the federal tax code and thus carved out of Oklahoma’s tax base through federal tax code conformity. The U.S. Treasury Department estimated those federal provisions totaled $158 billion for the corporate income tax and $1.146 trillion for the personal income tax in the 2014 fiscal year, summed nationwide.

Billions of dollars more were and are carved out for targeted “economic development” incentives given directly to specially selected firms, property taxes abatements and loopholes, and from the sales and use tax base.

Understanding the failure of tax cronyism begins with the recognition that the offending tax provisions and economic development programs are not pro-growth tax policy. Tax cronyism harms state economic competitiveness.

Taxes are not to be an economic tool; they are the funding mechanism for the tools of the state. The tax price of the mediating institutions of the state are largely a fixed cost. Thus, every dollar exempted from the tax base is a dollar that must be grabbed through higher tax rates.

Visualize this dynamic by contrasting the “seen” and “unseen” effects of tax cronyism. Society sees the ribbon cutting ceremonies that are the personification of tax cronyism. These spectacles feature the fortunate recipient of politically granted privilege commending the political class for their assistance. In conjunction with the attending policymakers and bureaucrats, all speakers promise a vibrant economy and shared prosperity.

But the promises of these ribbon-cutting ceremonies are empty. Unseen are the small businesses and start-ups not privileged by tax cronyism. They now face higher tax rates under a more narrow tax base. Their growth is stunted by higher tax rates, reducing their ability to expand operations, hire new employees, and reward their current employees with a path up the economic ladder through promotion and profit-sharing.

Those firms not granted a lower tax burden by the political process must compete on the economic stage with their more fortunate counterparts granted tax-based economic privilege.

Firms must compete for customers on the basis of price and quality, talented employees on the basis of opportunity value, and investment capital on the basis of return. Firms receiving tax carve-outs are better situated to compete on these margins.

Thus, tax cronyism creates cascading, second-order benefits to the fortunate few firms that receive it, creating an unbalanced playing field and a more stagnant economy.

The Tax Foundation has two studies that attempt to measure the implications of this tax complexity. Their “State Business Tax Climate” and “Location Matters” studies look beyond the general, top-line state tax rates and consider the imbalance that exists in the messy details of state tax codes. Oklahoma ranks 33rd in the Business Climate Index and averages only 19th across the seven “model firm” hypotheticals analyzed in “Location Matters.”

In short, Oklahoma’s tax code is uncompetitive, harming the advancement of shared prosperity. Tax cronyism is a big part of the problem. By striking the root of the problem, Oklahoma has the opportunity to be an island of economic sanity and an incubator of economic promise in a sea of red tape.

Policy Reforms

With the goal of ending tax cronyism firmly in sight, Oklahoma can take immediate steps to cultivate a policy environment that is fertile ground for a privilege-free tax climate.

• Embrace Transparency: Ensure rigorous reporting on all tax preferences and grants.
• Seek Clarity: There must be no exemptions or exceptions from the label of tax cronyism where it is appropriate. Similarly, the terms must not be abused by demagogues to wrongly malign sound policy focused on market-driven growth. Cronyism anywhere advances cronyism everywhere.
• Ensure Accountability: All tax carve-outs must have a clearly stated purpose and that purpose must be translated into critical, measurable performance metrics. Moreover, those metrics should be measured by a rigorous economic assessment by independent experts, relying on sound methods of analysis, and frequently reviewed by policymakers
• Avoid Gimmicks: Policymakers should avoid the temptation to “improve” tax cronyism by “building a better mousetrap.” The problem of cronyism is excessive economic central planning. New layers of complexity cannot fix the problems or reduce the costs of public policy complexity.

By taking bipartisan aim at tax cronyism, Oklahoma can unlock an economy of the future.

William Freeland is an independent public policy analyst, research economist, and data scientist with a decade of experience in public policy research and advocacy. He has worked as a research analyst and economist for the American Legislative Exchange Council (ALEC), as an economist at the Tax Foundation, and as a member of the research faculty at the George Mason University Law and Economics Center.