Targeted tax breaks shouldn't be allowed to fly under radar

The amount of money spent by the Government to subsidise the production of Hollywood films came as a surprise to taxpayers. Photo / Rotorua Daily Post

Opinion

The use of tax breaks must be more transparent.

Karyn Scherer's investigation has revealed that over the past decade, taxpayers spent more than half a billion dollars subsidising film and TV production. Much of this spending was delivered as tax breaks, rather than meted out using grant schemes.

The revelations show why we need more transparency about the scale and effectiveness of government spending on tax breaks.

Film production tax breaks are just one example of New Zealand's targeted tax breaks (tax credits, tax rebates, deductions, and the like) that subsidise chosen groups of taxpayers or activities. Farming, aquaculture, forestry, and mineral and petroleum mining enjoy industry-specific tax breaks.

And there are tax breaks for entities such as charities and sports clubs. Last year, Treasury counted 42 of these so-called "tax expenditures" in New Zealand's tax system.

Spending on targeted tax breaks typically receives far less scrutiny than other types of government spending. This is a problem.

When the Government buys goods and services or makes grants, it must get those costs approved annually in the budget process. But spending on tax breaks can fly under the radar because it does not have to be approved annually through the budget process. Once a tax break is enacted, there is no regular and comprehensive reporting on how much it costs each year, and no regular review of whether it delivers value for money.

Politicians may be tempted to use targeted tax breaks to push government spending undercover.

Tax breaks can be used as a budget gimmick.

For example, to avoid breaching a self-imposed government spending cap, a new spending scheme could be designed as a tax break.

Instead of creating a new grant scheme for a favoured industry, a government could propose a tax break just for that industry, and claim to be "cutting taxes".

Or a government could turn an existing spending programme into a tax break.

We know so little about government spending on targeted tax breaks that we can't be sure we are getting value for money.

Some tax expenditures might be more effective, transparent, and simple if turned into a grant scheme.

Some spending on targeted tax breaks might be better spent on other things. Or, funds devoted to targeted tax breaks might instead be used to cut tax rates for everyone.

The US offers a cautionary tale of spending on tax breaks gone wild. The US federal government spends much more on tax breaks than it does on national defence. New Zealand has traditionally avoided targeted tax breaks in favour of across-the-board cuts to tax rates, thankfully, so New Zealand likely spends a far smaller share of its budget on tax expenditures than the US. This means New Zealand's tax law is also simpler.

But we still don't really have a good handle on how much targeted tax breaks cost New Zealand. If we don't keep a close eye on tax breaks, politicians may be tempted to load New Zealand's tax system with costly and complex tax breaks, as has happened in the US.

Targeted tax breaks are by their very nature directed to particular groups of taxpayers or activities. This means that they can have a big impact on how taxpayers share in New Zealand's tax burdens.

But we currently don't know how spending on tax breaks affects how fairly New Zealand spreads its tax burden.

Treasury has a project under way to improve New Zealand's reporting on tax breaks. A brief report on tax expenditures accompanied last May's Budget.

Treasury should be congratulated for this initiative, but New Zealand is still a long way from matching the transparent and regular reporting on the cost of tax breaks seen in some other developed countries.

The revelations about film and TV subsidies offer valuable lessons. Large public expenditures, whether made through the tax system or through the budget process, shouldn't be allowed to surprise the public.

The effectiveness of tax breaks should be examined regularly. And Treasury's efforts to give more scrutiny to targeted tax breaks should be welcomed and supported.

* Chye-Ching Huang and Ruth Dobbie are senior lecturers at the University of Auckland Business School.