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Iowa's business climate: relatively better, actually worse

October 09, 2008

The Tax Foundation's new state business tax climate rankings came out this week. Iowa rose one spot on the list, to 44th best, or 7th worst, depending on whether you're the half-full glass type.

Unfortunately, it doesn't mean that Iowa did something to improve its business climate; according to Josh Barro, the author of this year's study, "It wasn't about Iowa doing better. It was about Maryland doing so much worse."

In fact, Iowa's tax climate actually got a little worse in absolute terms compared to last year. But Maryland passed a series of tax increases that knocked its tax climate all the way down from 25th best to 45th best, making it slightly worse than Iowa.

Source: The Tax Foundation. Click for larger view.

Iowa's business climate suffers from very high individual and corporate tax rates and a high degree of complexity, offset somewhat by a moderate sales tax and property taxes that, on average, are only a little worse than normal.

Mr. Barro notes that the Foundation's methods don't account for some aspects of Iowa's tax system that affect businesses on the ground. For example, Iowa's deductibility of federal taxes doesn't help the ranking, because the ablity to use the deduction can depend on skillful tax planning. The way Iowa's property taxes discriminate against non-farm commercial property also is not taken into account.

What about targeted incentives?

We asked Mr. Barro whether the Foundation gives credit for "targeted" tax breaks, like the recent Microsoft tax break package or the film subsidy program. They do - but not in the way the legislature would like:

"We rate that negatively. When you have a neutral tax system, the government is not discriminating between different kinds of activity. We prefer that state give corporate relief in a broad manner by cutting rates, rather than targeting."

Mr. Barro noted film credits as an especially bad way to "cut taxes." He notes, for example, that Michigan is being bled to subsidize Hollywood. After passing a big surcharge on business taxes last year, he says, "A quarter of the new revenue... is getting eaten up by the film tax credit."

As we've noted, there seems to be no momentum at all for fixing Iowa's broken business tax system. Still, there is a perverse hope in Maryland's tumble; if a state can go from 25th to 45th in one year, maybe a state could climb just as much with the right leadership.

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