Monday, December 31, 2012

A tax guarantee for Nike: An attractive bad idea

Governor John Kitzhaber wants the legislature to authorize him to guarantee that the basic formula under which Oregon taxes Nike’s income will not change for a certain number of years.  Initial reports suggest that this idea is a no brainer, or as Kitzhaber put it “an easy call” that will sail through the legislature.  

Looking only at the short term consequences, giving Nike such a guarantee is indeed an easy call.  The company will be building a new facility somewhere and is more likely to do it in Oregon if it knows that the state will not change the current rules under which it is taxed.   The expansion will bring jobs for construction workers and additional jobs at Nike itself.  It will be good for the Oregon economy and will increase tax revenues. 

Basic principles,  however,  suggest that giving this assurance to Nike will be a bad idea. 
The equal protection of the law is a fundamental safeguard against high-handed, discriminatory, arbitrary treatment by government officials.   Granting special treatment to selected corporations flies in the face of the whole idea of equality before the law.  It also widens opportunities for bribery of public officials by private interests.  And over the longer haul,  states which play these kinds of games with corporations will probably not come out ahead financially.

Of course Governor Kitzhaber’s proposal is not as bad as the more usual deals where selected corporations are exempted from paying some of their property taxes as an inducement to build a facility in a given state or city.  Here all Nike wants is to keep on being taxed only on its Oregon sales,  a rule which currently applies to all corporations and not just Nike.  But it still will have a planning advantage over other companies which have not been granted similar assurances against future changes.

Nike’s insecurity here is just one example of  a larger problem faced by corporations and by individuals when the laws are continually being changed.  James Madison wrote about this back in 1788 in The Federalist No. 62:  “The internal effects of a mutable policy are … calamitous.  It poisons the blessing of liberty itself.  It will be of  little avail to the people that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood; if they be repealed or revised before they are promulgated, or undergo such incessant changes that no man,  who knows what the law is today, can guess what it will be tomorrow.”

Perhaps Americans spend too much time debating what changes should be made in our tax laws and not enough time worrying about the bad consequences of making constant changes in those laws.  It just compounds this uncertainty problem when even the  rules that currently exist do not apply to all corporations. 

This piece has appeared in the (Portland) Oregonian,  the (Corvallis, Oregon) Gazette-Times, and the (Adrian, Michigan) Daily Telegram.

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