Subsidies Versus Discriminatory Taxation

I applaud John Andrews and Citizens for Responsible Aurora Government for opposing “tax increment financing” (TIF) for the development of ranchland in that area. (Westminster might be looking at a similar mechanism to fund the now-“blighted” Westminster Mall; I’m not sure where that project has headed.) However, I caution free market advocates to carefully distinguish between outright subsidies and discriminatory taxation. It is unclear to me based on the information from Andrews whether the Aurora case involves both or only the latter.

I have not taken a deep look at how TIF works in Colorado. My understanding is that TIF essentially redirects some of a plot’s property taxes back to the development costs of that plot. This is the equivalent of a property tax reduction for that plot. Sometimes, the property tax of surrounding “blighted” properties can also be funneled into that redevelopment; I’m not sure whether that’s the case in Aurora. (Redirecting the property taxes of some plots to the owners of others is definitely a subsidy.)

Insofar as the TIF scheme involves only a plot’s own property taxes, the TIF should be considered a discriminatory tax, not a subsidy. A subsidy is the forced redistribution of tax funds from one party to another. A discriminatory tax taxes different parties different rates based on political considerations.

If a TIF scheme results in raising tax rates on other people in an area to pay for city services, that is still a discriminatory tax, not a subsidy.

In general, I am opposed to any policy that increases discriminatory taxation. It’s just not fair for governmental bodies to screw some citizens harder than others. It also makes for bad politics, as those with political connections get special tax breaks, while those without connections get screwed (worse).

However, I am NOT in favor of doing away with existing discriminatory taxation when that means raising net tax collections. If a mugger steals $10 from Abe and $20 from Ben every week, the situation is not improved if the mugger starts stealing $20 from Abe as well. Instead, I favor converting discriminatory taxes to equitable ones only when it results in the same (or less) total revenues, meaning some people will pay lower taxes.

A discriminatory tax involves taxing comparable parties different rates. I am not including taxes that treat basically different parties differently. For example, a progressive tax taxes the wealthy a higher percentage, but this applies universally. If you are wealthy and then you become poor, your tax rate will automatically drop. Likewise, when Colorado charges a sales tax on a purchase from a Colorado retailer but not from a Washington retailer, that is not discriminatory in the vicious sense, because federalism is incompatible with interstate taxation.

Having made that caveat, I am prepared to declare that discriminatory taxation is bad, and the proper remedy is to equalize tax rates such that total revenues stay the same or drops.

One thought on “Subsidies Versus Discriminatory Taxation”

  1. Comment by Allen March 7, 2010 at 10:24 AM

    Isn’t any TIF always a subsidy? Yes, there is the element of it being a discriminatory tax. But in a way, it’s also a loan. A loan that the developer may not have been able t get for that project or, were they able to financing from private institutions, at a higher rate. Or is that not quite right to say that either?

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