“Why Tax Rates Matter More Than Incentives”

Here’s an excellent article that explains why lower property tax rates are more important than economic incentives for attracting new businesses. Our local politicians (and the wheels pulling the levers) would like you to believe that all the shiny gewgaws are necessary to attract new business, but really they have their own agenda that has nothing to do with improving El Paso’s economy.

[A]s transportation and communications costs have dropped, and trade barriers and currency-controls have also declined, there is more cross-border investment than ever. In the old days – say, before 1995 – economists were thinking about how to use taxes to get a domestic firm to boost its domestic investment on the margin, for example, by 3 or 4%. In that case – that is, in the case of investment of borderline profitability – traditional incentives can mean a lot. And because this was the type of investment governments were trying to encourage, using tax credits and depreciation was a revenue-efficient way for governments to provide investment incentives. But with increased capital mobility, economists have changed their thinking about how taxes motivate investment. Under the new paradigm, governments are trying to influence location decisions of multinationals. Because these decisions involve large chunks of investment – not just those marginally profitable – tax rates matter more than tax credits.

To be fair, maybe those titans of industry and our elected officials (especially the last crop), might not be diabolical. Maybe they just not as smart as they think they are.