Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

DES MOINES REGISTER HIGHLIGHTS TAX INCENTIVES

June 05, 2005

From the banner article in today's edition:

Tax breaks' costs, benefits elusive

Privacy laws, array of programs complicate analysis

Iowa lawmakers keep expanding efforts to help businesses - this year rebating sales tax money to developers and adding new tax credits for job creation. But few officials, if any, can answer a basic question: How much does Iowa spend to boost its economy?

Finding the answer is key to addressing another issue: Are taxpayers getting their money's worth from the public subsidies?

The long piece by Donnelle Eller, Register Business Writer, does a good job of laying out all of the different facets of the debate over tax incentives.

TAX INCENTIVE FANS

There's the businessman who says he has to have tax breaks, or he'll go where the subsidies are greener:

Chris Nelson, president of Kemin Industries, said he receives 20 to 30 calls each week from states and countries that want him to relocate his company's operations. "The offers usually come with . . . all sorts of possible economic incentives," said Nelson, whose food-supplement company received $4.4 million in state and local incentives to build an $11 million headquarters and manufacturing expansion in Des Moines.

There's the legislator who gets lots of feedback from the happy beneficiaries, and who doesn't seem to think somebody else is paying for the benefits:

Rep. Clarence Hoffman, R-Denison, said he might have more concerns about tax credits, if he didn't see that they're creating new jobs and attracting new investment. "The rewards will be seen for years to come," he said.

There's the economic development official who justifies his salary by helping lure businesses by showing them loopholes that enable them to avoid the taxes everyone else has to pay:

Blouin said the state's economic development efforts are clearly working.

Since 2003, when the Iowa Values Fund was created, the state has awarded $77.8 million in loans and grants to 268 companies. The amount includes Iowa Values Fund money, plus loans repaid to the state and money from existing programs, said Tina Hoffman, the development agency's spokeswoman.

These happy perspectives are like looking at the health of an ecosystem based on how fat and happy the mosquitoes are. You can identify how happy the 268 beneficiaries of the fund are, but somebody else is paying for it - the thousands of other businesses that are unable to harvest any tax breaks, and who pay the costs of running the state on behalf of those who do.

The article points out how tax privacy laws make it impossible to identify who benefits from the tax breaks, or to determine what their costs and benefits really are:

Michael Ralston, director of the Iowa Department of Revenue and Finance, said he would risk going to jail if he complied with a Des Moines Sunday Register request to provide a list of companies that shared an estimated $32 million in tax breaks for research and development in 2004.

The article also quotes the Iowa Taxpayers Association, which inexplicably favors Iowa's byzantine raft of tax breaks:

The Iowa Taxpayers Association, which opposes most kinds of taxes, favors tax-supported incentives for businesses.

One reason, said Stacey Johnson, president of the group, is the high rates Iowa businesses pay. An association study showed Iowa industrial companies' tax burden ranked 12th-highest in the country . Commercial property owners' bills were third highest . Overall, Iowa businesses pay 43 percent of the total state and local taxes, she said.

Astonishing. Did it occur to Ms. Johnson that the rates are high in part because of the 20-odd incentive credits in the tax law?

THE DISSENTERS

The article notes how efforts by Rep. Pam Jochum of Dubuque to require an accounting of economic development incentives died from lack of interest. The article also mentions the Ohio court decision that threatens Iowa's tax incentives.

The article also presents views of someone who doesn't think tax incentives are a great idea:

Joe Kristan, a corporate accountant at Roth & Co. in Des Moines, suspects the tax incentives are growing because more businesses are savvier about tapping experts like him to "harvest" the tax code for breaks. Instead of encouraging new activity, the breaks likely reward businesses for current activities.

"Targeted tax credits hide the real cost of what are basically subsidies," Kristan said. "They may be for a good cause, but that doesn't mean that someone else should pay for it."

That's the scariest part of being interviewed: the likelihood of being quoted accurately, which I was.

I'm sure the Register editors thought the story was plenty long enough, but I wish they had used my little newsroom fable:

Reporter Bill goes to his editor for a raise because his car is old and he needs a new one. He has done a statistical study explaining how good it would be for the paper for him to have a car -- better stories, more circulation, and so on.

The editor feels his pain, but has no money in the budget for raises. He has an idea, though: he will reduce the state tax withholding from Reporter Bill's paycheck by enough to cover his car payments. He will make it up to the state by increasing the withholding from everyone else in the newsroom.

Just imagine how excited everyone in the newsroom will be to help Bill pay for his car - especially when the editor explains how it's for the good of the paper.

Targeted tax credits work much the same way as the Reporter Bill withholding system.

Repeat after me: With its tax incentive system, Iowa taxes its existing businesses to lure and subsidize their competitors.

Related Coverage:

WHITHER IOWA'S TAXES?

A list of Iowa's Targeted Tax Credits.

 • Iowa Tax Law       Bookmark: del.icio.us • Digg • reddit