States already give away billions in handouts to certain private companies by exempting them from property, sales, income, and other taxes. By letting companies keep the income taxes that they withhold from their employees, states can give them even more subsidy. This is yet another handout to private businesses, and it's bad policy — in practice and in principle.
Handouts like these create an unlevel playing field. The government should not pick winners and losers in the marketplace. It is unfair to make unfavored businesses and taxpayers pay more to cover the cost of the handout. This makes it harder for them to compete.
The process is not transparent. According to the report, of the 16 states that do this, none requires informing the workers. Their withholdings are treated as taxes they paid — the workers remain unaware that the money taken out of their pay goes back to their employer, and not the state government's coffers. (Targeted tax exemptions, deductions, and credits may also be bad policy, but at least state governments track them.) Taxpayers should know where their money is going.
To make matters worse, these companies are failing to produce the jobs and activity that they promise. For example, as I highlighted previously on PolicyMic, the Missouri government gave Ford Motor Company $150 million in tax credits to create jobs and invest. According to the Good Jobs Report, of the states that withhold and keep personal income taxes from their employees, this particular handout to Ford was the 2nd largest.
This is cronyism, and employees should get their money back. They would be better off if they weren't supporting their employers with bad tax policy.