A Sept. 26 Capitol News Service online article, “Tax breaks, code updates pushed to promote energy efficiency” describes yet another set of special tax credits being sought in Michigan, and also offers a textbook example of what economists call “rent seeking.”
Rent seeking is a fancy way of saying favor seeking, and is done by firms or industries who turn to government for special privileges in the hope of collecting higher than normal returns, or “rent” than they would otherwise earn in an unfettered marketplace. Here’s what the CEO of the Michigan Association of Home Builders, Robert Filka, says in that article: "We aren't looking for a handout ... What we are saying is give Michigan homeowners and consumers a break. Give them an incentive and a reason to invest in and improve their homes."
Filka, who before coming to the Homebuilders spent many years in the state's "economic development" bureaucracy — the people who pick winners and losers in these discriminatory selective tax favor programs — knows the ways and means of this game better than most. While technically this particular measure may not be a handout, it’s certainly a special favor that will benefit the industry he’s paid to represent. After all, if the building industry just wants to “give consumers a break,” why doesn’t Mr. Filka’s association just lobby for across-the-board tax relief? Instead, they would force taxpayers to jump through a construction hoop in the hope of getting a bit of tax relief.
Those who seek (and grant) the special tax favors always proclaim that they create gobs of jobs. However, targeted tax credit programs don’t have a very good track record on that count. Besides, the logic is confused: If tax relief creates jobs in one industry, why limit it rather than granting it to all?
Beyond those immediate concerns are deeper ones. These discriminatory tax breaks chip away at the rule of law by replacing uniform rules and regulations with a patchwork of special favors for which taxpayers must come before legislators and bureaucrats to beg — they establish the rule of men not laws. Unlike across-the-board tax cuts, they increase government power by placing this extraordinary power of discretion into the hands of current officials. (This point often escapes fiscal conservative legislators who have been habituated to view any “tax cut” as a good thing.)
Perhaps the toxic economic and political atmosphere that creates explains why rent seeking itself is a jobs killer. Economist Harold Brumm studied the effects of rent seeking from 1985 to 1994 in the 48 contiguous states. His research shows an empirical link between the degree of rent-seeking in a state, its tax burden, and its economic growth rate, adjusted for inflation. He writes:
"The conclusion reached here is that rent-seeking activity has a relatively large negative effect on the rate of state economic growth. An implication of this finding is that a state government which promulgates policies that foster sustained artificial rent-seeking does so at considerable expense to its economic growth."
Brumm’s modeling did not specifically include the type of economic development incentives detailed in this blog, but he does recognize that Michigan Economic Development Corporation-type of activities are part of the larger Lansing rent-seeking apparatus (such as the kind that hand out tax credits to the favored few). In an upcoming post I’ll describe the bureaucratic inertia behind MEDC - the state’s official “jobs” department - which is helping to make big government even bigger.
