Tax Update Blog: Permalink

« Previous · Tax Update Blog Home · Next »

LEFT-SIDE THINK TANK: TARGETED TAX BREAKS A WASTE

April 24, 2008

The Iowa Fiscal Partnership has issued a report saying that one of the biggest corporate welfare economic development tax credit schemes in Iowa is a big waste of money. Some points from the Executive Summary of their report on Iowa's Enterprise Zone tax credit program:

Although the subsidies received under the program are difficult to pin down, the raw numbers are daunting: Between 2003 and 2007, zone businesses racked up nearly $300 million in tax credits.

Although the flow of tax credits is hard to measure, it is clear that it is not following the program’s intent into new industries and distressed areas. Of the hundreds of millions in credits for 2003-07, nearly a quarter (over $80 million) were claimed by a few well-established insurance, financial service, agricultural processing, and agricultural equipment firms.

The state’s calculation of the program’s performance vastly overestimates its benefits and underestimates its costs. Our reassessment finds each new job created under the program to cost — on average — over $100,000.

So the state spends $100,000 per "job" and the money goes to well-established - and well-connected - interests. In other words, you pay taxes to subsidize the biggest companies in Iowa.

The report gives this "bottom line" (my emphasis):

Iowa’s Enterprise Zone Program is a practical and fiscal disaster. Its 1,200-odd zones sprawl across the state in such a way as to undermine any pretense of targeting subsidies at truly distressed areas. Its subsidies and tax credits are expansive. And the results are unimpressive at best and disturbing at worst. Again, the research on enterprise zones and their efficacy is quite clear on this point: Given the larger logic of business location, tax incentives are likely to have only a marginal impact on decisions made by investors and employers. Some of the money spent will simply encourage firms to locate in one part of the state rather than another — at no net gain and considerable cost. Much of the money will simply chase new investment and new employment that would have occurred anyway.

The report chickens out of the logical solution: getting rid of all of these absurd corporate welfare tax credit schemes, and instead lowering individual rates and eliminating the corporation income tax. It instead takes a "mend it, don't end it" approach to the program, which is a cornerstone of the Democratic approach to economic development. Still, the report does a nice job of pointing out the futility of the tax-credit approach to economic development, even if it fails to draw the logical conclusions from their findings.

In a better world, Iowa's right-side tax policy groups would be making the same points from a free-market, small-government perspective, but Iowans for Tax Relief is a shameless loophole lobby for the interests that harvest these tax subsidies, and the Public Interest Institute has not tackled Iowa's dysfunctional tax system of high rates and subsidies.

Tags: corporate welfare.economic development.iowa tax policy.

      Bookmark: del.icio.us • Digg • reddit