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TARGETED STATE TAX BREAKS: DISCLOSE OR DISPOSE?

December 20, 2006

The Iowa Fiscal Partnership, a left-side think tank in Des Moines, issued a useful report on Iowa's economic development tax breaks yesterday. The report calls for more disclosure of Iowa's economic development tax breaks:

“The problem is that itʼs hard to tell how effective these tax breaks are in promoting new economic activity,” said Victor Elias, senior policy associate at the Child and Family Policy Center (CFPC) in Des Moines and co-author of the report for the nonpartisan Iowa Fiscal Partnership (IFP).

“These tax breaks have almost no reporting requirements and individual recipients remain unknown,” Elias said. “This is the publicʼs business, and no one is minding it.”

As Mike Ralston pointed out when he was state Revenue Director, you can go to jail for disclosing this information under current Iowa law. This is so even though some of these breaks are "refundable," meaning the state actually gives cash to businesses if the tax breaks exceed their tax liability.

To beneficiaries of these breaks, that's a feature, not a bug. It allows you to get subsidized without annoying questions from reporters, legislators and lobbyists for your competitors. For the public, though, it's a bad deal - it's subsidies to private interests with no accountability.

The report recommends sunlight as a cure for this problem. The recommendations include:

• An annual Economic Development Tax Expenditure Report, showing all such tax expenditures, shall be provided to the General Assembly within three months of the close of the state's fiscal year.

• All data in the Economic Development Tax Expenditure Report and the state's new tax credits tracking system shall be public record under Iowa's Public Records law and made available online through a searchable data base.

• A searchable data base of economic development tax expenditures, by company, shall be available to the public online within three months of the close of the state's fiscal year.

• Sunset provisions for each economic development tax expenditure shall be included to force a review of its annual cost and to determine if it is accomplishing the intended public purpose.

• Provisions should assure the state's ability and authority to recapture tax credits from businesses that do not accomplish stated goals.

The report also tells how other states handle these issues. In some states (e.g., Minnesota), you can actually look at the tax forms for these breaks for individual companies.

This all makes sense if you think these breaks make sense in the first place. Right now these breaks are an insider game with no accountability. As long as the state taxes existing businesses to lure and subsidize their competitors, disclosure is only fair.

Still, that begs the question: should the state be granting these breaks in the first place? Almost certainly not. Any "targeted" tax break is by definition a form of central economic planning. Even Japan has moved away from its discredited "industrial policy." If they can't pull it off in Tokyo, what chance do the economic geniuses at the statehouse have?

Far better to simplify the tax system by culling the loopholes and lowering rates for everyone -- not just the folks with the best connections at the Capitol.

Links:

Iowa Fiscal Partnership press release

Full Report (pdf)

Des Moines Register coverage.

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