Corporate Welfare Program Would Give Tax Money to Failures
Economists decry tax credit corporate welfare plan
Entrepreneurs are supposed to take risks, but in Maryland, a new proposal would lavish welfare handouts from the taxpayers onto high tech companies that lose money. No more risk! Thanks to www.goodjobsfirst.org for circulating this article.
by Steven T. DennisEconomists and tax experts are attacking Montgomery County Executive Douglas M. Duncan's plan to provide money-losing high-technology companies with a cash infusion as corporate welfare.
"I think it's an extraordinarily bad idea," said Stephen S.K. Walters, an economics professor at Loyola College of Maryland in Baltimore. "It's really opening a Pandora's Box of ill effects."
Duncan's proposal would allow high-tech companies to sell their net operating losses to profitable companies, who would use the losses to offset their state income tax.
Dr. Walters, who has been an adviser to former Republican gubernatorial candidate Ellen Sauerbrey, said the plan would give companies that are too weak to attract venture capital on their own an unsecured infusion of cash from taxpayers. And companies that are strong enough to secure venture capital do not need the money.
"This is corporate welfare, pure and simple," he said.
Failure is Part of the Free Market -- Subsidy is Not
Most high-tech startups fail, which would leave taxpayers with nothing to show for their investment, Walters said. "There is no convincing reason why the taxpayers should be on the hook to keep them afloat."
Although the details of Duncan's proposal are still being worked out, a similar law in New Jersey cost the state's taxpayers $50 million in tax revenue its first year.
David Brunori, contributing editor to State Tax Notes magazine and an adjunct professor teaching state and local tax law at George Washington University Law School in Washington, D.C., is also skeptical.
"This is just another attempt at throwing money at companies when there is no need to," he said.
Brunori, who has previously criticized welfare handout deals for Marriott International and America Online, said tax incentives are particularly insidious because, unlike an appropriation that is reviewed every year, tax loopholes typically stay on the books indefinitely without review.
"Instead of appropriating and writing them a check every year, they are going to set up this tax scheme, and no one is ever accountable for it," he said.
Subsidizing Losers: Fancy Lifestyles and Failing Businesses
Andrew Jordan, chief financial officer of Baltimore-based Guilford Pharmaceuticals, said Duncan's proposal could bring his company $3 million to $4 million of taxpayer money, enough to cover his company's capital costs for a year or two.
The company has lost more than $80 million and is "burning through cash" at $30 million to $40 million a year, Jordan admitted. "The net operating loss is just sitting there."
John Holaday, chairman, president and CEO of EntreMed in Rockville and president of the Maryland Bioscience Alliance, first proposed the idea of allowing tech companies to sell their net operating losses to profitable companies earlier this year at a committee hearing in Annapolis.
He claimed the welfare handout program on its own probably would not make a difference in the success or failure of a company -- that is going to happen in the clinic and in the marketplace. [Here the Progress Report must ask -- in that case, why abandon the free market and force the taxpayers to make welfare handouts, if the failures will still fail?]
"I think if I was starting a brand-new biotech company and the state of Maryland did not pass this [welfare handout], I would seriously consider moving to New Jersey," he said.
EntreMed, which is investigating a number of potential cancer treatments, could be a prime beneficiary of the proposal. The company has accumulated losses of more than $100 million, which would translate to about $5 million in state income tax credits that it could sell to other companies.
Amy Finan, Montgomery County's director of technology program development, said the subsidy proposal would spur high-tech growth throughout the state. The state would screen applicants to make sure that they have a good chance of becoming profitable at some point before they would be allowed to take advantage of the taxpayers, Finan promised.
Greg LeRoy, director of Good Jobs First, a national clearinghouse on economic development practices, said Duncan's proposal goes against economic development trends: Tax incentives are taking a backseat to the labor shortage for high-tech workers.
"[The high-tech industry] is not calling for more cheap capital, it's calling for more skilled labor," LeRoy said. "It's really a compelling argument toward shifting resources to anything that gets you more high-tech workers, and that ain't Byzantine tax credits."
"I would argue that cooking up Rube Goldberg devices to further lower your tax base ... is really poisoning your business climate," he said.
"You don't want to artificially prop up companies that can't make it," said Douglas Koelemay, a vice president with the Northern Virginia Technology Council. "It keeps that dynamism from occurring and begins to shackle the economy and freezes things in place."
With Duncan's plan, he said, the state essentially would be investing in high-risk tech startups, which often fail. "There is a question of whether the public should bear that risk."
In the new economy, government needs to change its focus from handouts for moneylosing companies, to training and retaining skilled workers, Koelemay said.
Companies are forming, failing and being sold at a much faster pace than ever before, he said, noting that workers laid off from Microstrategy last month quickly found new jobs.
As long as the high-tech workers stay in the Washington area, the public benefits, he said.
Loyola College's Walters agrees.
"The high-tech sector is a very dynamic industry. It has no problem attracting capital and it has no difficulty sorting out winners from losers," he said. "This [welfare proposal] is sand in the gears."
Companies that do fail free their workers to join better-run companies, boosting overall efficiency, he said.
Koelemay said setting up a secondary market in tax credits would result in companies "farming Washington instead of farming the land" by lobbying for the tax credits instead of focusing on their business.
"We are very hesitant to have a public body [rather than the marketplace] making decisions on who the winners and losers will be," Koelemay said. "It has the possibility of being a pretty big mess all around."
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