MPPI’s Gabriel Michael argues the pro’s and con’s of tax credits and their impact on economic activity.
Inertia goes a long way in politics. Entitlement programs, once established, can be incredibly difficult to reform or repeal – consider the current debate over Medicare, or earlier attempts to reform Social Security during the Bush administration. But inertia isn't limited to entitlements – it also runs rampant throughout the tax code. Tax credits established years ago often escape the scrutiny of the legislature, even well after they have outlived their usefulness. Because such credits are not perceived as a direct expenditure, they less frequently become targets of spending cuts.
Yet the distinction is illusory. There may be philosophical reasons to prefer tax credits to direct expenditures, but the effect on the state's bottom line is the same: a tax credit is financially indistinguishable from a direct payment of the same amount. In fact, in economics, public policy and public finance, tax credits are often referred to as “tax expenditures.”
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