Government letting companies and people keep more of their money is not a ‘handout’

Yesterday, looking at the recent Foxconn deal in Wisconsin and the proposed Louisiana-Pacific siding facility in northern Minnesota, I argued against taxpayer subsidy for private business. But that is not to say that all such criticism is well founded. Indeed, some of it is well wide of the mark.

“You can’t lose what you ain’t never had”

It has been widely reported that the “Foxconn package would cost $50 million in lost sales taxes”. In fact, it won’t cost anything in lost sales taxes. At present, the state of Wisconsin and its various municipalities do not have that revenue. If Foxconn doesn’t come they will not get that revenue. If Foxconn comes but does not pay this tax, the state and municipalities have not lost it. They never had it to lose.

In fact, the opposite is true. If Foxconn wouldn’t have come to Wisconsin without a sales tax rebate – and, as our own Governor Mark Dayton explained, “Incentives do make a difference” – then any tax its pays at all is a gain to the state and municipal governments, and the tax rebates represent no offsetting ‘cost’. Because, to repeat, giving up something you didn’t have in the first place is not a ‘cost’.

A similar point can often be made about tax credits. If a company gets a 20% tax credit on a liability of $100 million, this is not a $20 million ‘handout’ to the company. Taking less of someone’s money is not the same as handing it out to them.

The use and misuse of tax credits

The problem in the case of Foxconn is that the tax credits are ‘refundable’. If Foxconn meets certain capital and employment compensation targets, it will receive up to $200 million per year in refundable tax credits, capped at $2.85 billion. If, for example, Foxconn’s liability was $150 million in a given year, it could claim $50 million from Wisconsin’s taxpayers.

‘Non-refundable’ tax credits are different. With those, a company can reduce its tax liability but not below zero. It could not, in the case of Foxconn, claim any money from the taxpayers of Wisconsin. As above, these do not represent a ‘handout’ from the government because the government didn’t have the revenue in the first place to hand it out.

‘Handouts’ for the rich are usually no such thing

The same mistakes are often made in discussions of personal taxation. Cuts in tax rates, usually for higher earners, are labelled ‘handouts’. But income tax is paid by individuals to the government, not the other way round (excepting certain tax credits for the moment). Tax rate cuts do not mean that the government is handing out money to taxpayers. They mean that taxpayers are handing out less money to government.

As the late, great Muddy Waters sang, you can’t lose what you ain’t never had.

John Phelan is an economist at Center of the American Experiment.