Despite good policy reforms from Gov. Mitch Daniels and our Republican-led General Assembly, Indiana is bedeviled by fiscal shenanigans that imperil both our economic health and civic morals.
Surrounded by neighbors with sluggish growth rates and lingering state budget crises, it is true that Indiana is starting to look like an economic powerhouse. The Hoosier state has bounced back strongly from the 2009 recession, posting the highest growth rates in the rust belt in 2010 and 2011. Indiana also scores higher than Michigan, Illinois, Kentucky and Ohio on state economic-policy rankings from three growth-focused think tanks (Illinois narrowly beats us in a 4th ranking).
Considering that these rankings do not include the recent Right to Work or Choice Scholarship reforms, the upcoming corporate income tax cuts or the better-than-projected state budget surplus, it looks like Indiana has only just begun to demonstrate what real economic recovery looks like.
The trouble stems from the fact that Indiana politicians keep finding ways to subsidize special interests at the expense of the general taxpayer. Although these stories aren't front-page headline material, we can cite many recent examples, from stadium taxes to state contract preferences for “local” companies.
Possibly the most egregious of these practices is the widespread use of “economic-development” tax credits. Bribing large companies to set up shop in their districts is a hackneyed job-creation game that local pols and economic-development bureaucrats have been playing for decades. It's also a gross violation of one of America's founding legal principles: the idea of equal protection of the law. Targeted tax cuts mean government is applying different rules to different people.
Such policy says, “If you're a large company with a visible impact on the labor market, we'll subsidize you. If you're too small to make headlines with large job promises, you pay full price for the blessings of government.” And although this “press release economics” has been tried all across the state, it's unneeded at best and counterproductive at worst.
Truly productive enterprises — i.e. those whose costs are less than their revenues — don't require government subsidies. Subsidizing private industries simply generates temporary spurts of artificial growth that comes at the expense of genuine economic development.
All that's needed to maximize economic growth is low and uniform taxes, wherein politicians can't pull strings and play favorites through the tax system. “Broaden the base, lower the rate” is a proven formula for growth; targeted tax cuts are a proven formula for wasteful special-interest favoritism.
If the subsidy-by-tax credit system isn't bad enough, just wait until you get a load of the fiscal extortion racket known as the Leucadia project. This state-sponsored scheme to build a synthetic natural gas plant in Spencer County involves the state acting as a broker for a private company, a state-mandated purchase of a private good and even attempts at using eminent domain powers for the benefit of a private enterprise.
Though the Leucadia project is stalled, and may yet die, it reveals a fiscal environment still mired in special interest favoritism. Leucadia exemplifies a tax-Peter-to-subsidize-Paul philosophy that is neither just nor conducive to economic growth.
Balanced budgets and low taxes are great but the fine details of fiscal policy still matter. Again, the good news for Hoosiers is that our state's overall fiscal and economic policies are moving in a good direction.
There's at least one major reform left to go, however. We need to put a stop to this political flimflam of using fiscal policy to pick winners through subsidies, targeted tax breaks and other favors for well-connected, headline-making business interests.
If we can get state government wholly focused on its core competencies of providing public goods like highways and the legal system, and end the attempts to micromanage and subsidize growth, our state's economy will flourish like never before.
If you like our growth rate now, just wait until we leave all economic development decisions to the entrepreneurs instead of the politicians and bureaucrats.