Iowa’s “economic development” policy: bipartisan follies.

September 9th, 2013 by Joe Kristan

Three economic development opinions, each wrong in its own way.  The Sioux City Journal, to its credit, had a special set of features on Iowa’s “Economic development” tax credits over the weekend, running two guest columns and an editorial on the topic:

Debi Durham, director of the Iowa Economic Development Authority  State incentives are necessary to keep Iowa competitive.

Joe Bolkcom, Chairman of Iowa Senate Ways and Means Committee, Costly tax giveaways are not best way to grow Iowa’s economy.

Sioux City Journal editorial,  OUR OPINION: Incentives help level playing field for Iowa.

 

durhamWe’ll start with Ms. Durham, as she is Iowa’s official tax credit promoter.

Our tax climate puts Iowa at a competitive disadvantage.

She’s got that part right.  Iowa has an extremely complex tax system, but one full of complexity and loopholes. Unfortunately, that’s as good as it gets.

Using tax incentives to reduce the high burden our current structure imposes on job creators is one way to balance the bottom line and keep Iowa in the running for these highly competitive new investments.

Lowering the rates and eliminating the loopholes to take the Iowa Economic Development Authority out of the picture is another way.

Ideally, we would reform our tax system in a comprehensive way (and I’m eager to work with Sen. Joe Bolkcom to do just that), but until then, incentives are essential.

Sen. Bolkcom contends the incentives we utilize to recruit and retain these projects are too large and that we don’t get enough in return. But incentives are a good investment. The state sets aside $170 million annually in tax incentives to invest in these proven economic development programs that pay Iowans back in new jobs, new capital investment, and increased revenues that can be put to work for Iowa’s taxpayers.

“Proven economic development programs?”   If she’s talking about tax credits, the proof is thin.  Back in the Culver administration, after the Film Tax Credit economic development program exploded in scandal, a blue-ribbon committee failed to find any solid evidence that any of the state’s dozens of “targeted” tax breaks did any good.

The state budgets for these incentives and the return on investment is calculated prior to every award, and each project must meet job creation and capital investment requirements before it is even considered.

The key word is “before.”  The awards work because they are projected to.  It’s self-fulfilling!  There is no consideration that the projects might happen without taxpayer money, and no consideration that the money being spent on the recipients of these projects is coming out of the pocket of other taxpayers, eliminating just as much economic activity as is being “created” by the tax credits.

bolkcomNow we turn to Senator Bolkcom.  We’ll start with what he gets right:

To cite the Orascom deal again, that corporation’s bottom line got a huge benefit because it won’t pay property taxes for the next 20 years. This will hurt Lee County’s existing local businesses and homeowners. They will pay Orascom’s share of increased road maintenance, fire, police, school and other costs.

Correct.  And it’s not just Lee County.  All other Iowa taxpayers have to pay more so Orascom can pay less.  He’s coming close to getting it right.  So close, but…

Third, the size of economic incentives should be based on the number of good jobs created, not the size of the capital investment. If Iowa had done that, we wouldn’t be paying Orascom more than three million federal, state and local dollars for each promised permanent job.

…not quite.  The senator accepts the premise that the state has the ability to “target” companies to bring good jobs — that the state has the ability to wisely allocate investment capital.  If you believe that, I have a film tax credit program to sell to you.

 

The mistake is the idea that Iowa is competing only with other states when it issues these credits.  When an out-of-state business gets money from Iowa taxpayers to move here, it isn’t other states that write the checks — it’s Iowans.  And the beneficiaries use their subsidies to compete with existing Iowa businesses for customers and for skilled workers.  They take money from Iowa’s existing businesses and their employees to lure and subsidize their competitors.

And even looking at it from the perspective the companies Iowa is trying to seduce, it has to look dodgy.  Iowa looks like a guy who walks into a bar with his wife’s purse, dipping into it to buy drinks for the girls.  It’s not impressive, and girls he gets that way probably aren’t real prizes to begin with.

 

If Iowa's income tax were a car, it would look like this.

If Iowa’s income tax were a car, it would look like this.

While the Governor and his economic development officials give lip service to fixing Iowa’s tax system, they haven’t done much to make it happen.  They have pushed through property tax reform, but the income tax system has only added more loopholes and special interest carveouts.  Every new tax break creates a new sworn enemy to real tax reform — drastic simplification, drastically lowered rates, and elimination of the futile Iowa corporation income tax.

It’s much easier to hold a press conference and hand out tax credits than to build the case for tax reform that helps taxpayers who lack lobbyists and fixers.

Related: The Tax Update’s Quick and Dirty Iowa Tax Reform Plan.

 

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