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TAX CREDITS AND THE RIPPLE EFFECT

August 20, 2007

20070820-1.jpgThe Des Moines Business Record examines Iowa's 33 tax credit programs in a piece called "The Ripple Effect." It's an appropriate title, as economic development credits are to economic development as Ripple wine is to healthy hydration.

The Business Record piece isn't shy about drawing conclusions; the author thinks that they just magically create jobs:

It's hard to argue with incentive programs that lead to hundreds of millions or even billions of dollars in new capital investment and the creation of thousands of new jobs in the state. The investments spurred by tax credit awards have been particularly valuable to many of Iowa's rural communities, said Michael Tramontina, director of the Iowa Department of Economic Development.

Actually, it's not that hard to argue with them. The argument starts with the idea of "opportunity costs." The piece says that there have been $1.23 billion of economic development credits issued over the past ten years. What else could have been done with that money? What if it had been left in the hands of the taxpayers, instead of doled out to well-connected businesses? What if it had been used to keep a key highway bridge from falling down?

Another issue is whether the credits reward taxpayers for things they would already do. While the economic development folks always claim responsibility for projects that get credits, many, perhaps most, of those projects would have happened anyway. The recent changes in Iowa's rehab tax credit actually issued new credits for rehabilitation work that had already been done.

The piece quotes economic development director Tramontina:

"You really have to consider how big those (ethanol plant) investments are," he said. "For a rural county to get an investment of $175 million to $225 million, that's more than the equivalent of adding an 801 Grand (building) in one of those counties." The dollar amount of the tax credits awarded to those plant projects has averaged about 7 percent of the total private investments, he said.

Time will tell whether this was a benefit. If these ethanol plants end up bankrupt and shuttered in a few years - a very real possibility, as they can survive only as long as they are richly subsidized by the taxpayers - all of these economic development funds will turn out to have been poured down a rathole.

The whole idea of tax credits implies that statehouse politicians are some kind of economic supergeniuses who can funnel taxpayer funds into the optimal economic activity for the state -- or at least better than private equity and credit markets. That's ridiculous. If they were so smart, they would be making millions as investment bankers rather than $21,380 as state legislators.

That doesn't bother the politicians:

What isn't slowing is the pace at which tax credits are being claimed. State officials estimate that by 2011, businesses and individual taxpayers will claim about $400 million in credits against their taxable income, compared with $157 million in credits actually used in fiscal 2004, the latest year for which data is available.

20070820-2.jpg

As a recent report by the State Auditor's office shows, these credits often fail to meet their hype. For example The report showed that of 30,732 "pledged" jobs from the Grow Iowa Values fund credit program, only 13,730 had really been pledged under the terms of the program, and many of those were receiving other funding.

Bottom line? Economic development credits make Iowa business and employees that lack good statehouse connections pay higher taxes to lure and subsidize their wired-in competitors.

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