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Will tough times cause a review of Iowa's corporate welfare system?

January 12, 2009

The Des Moines Register says that the legislature may take a long-overdue look at Iowa's corporate-welfare-via-the-tax-law system in the session that starts today. They also printed two opinion pieces that inadvertently show how we arrived at our current mess.

The Register tees it up:

Up for grabs are more than 200 sales, income or property tax exemptions as well as dozens of tax credit programs that range from tax breaks for the purchase of argon gas to programs that refund millions of dollars every year to companies doing research in Iowa.
The exemptions - many decades old - were put into place for Iowa to remain or become competitive for high-paying jobs and skilled workers.

But many of the incentives have been on autopilot, dragging on for years without an examination of what benefits they provide to Iowan

Whenever the state passes out subsidies, you can count on the subsidized to defend them:

"How does the state expect to be competitive in attracting business without those kinds of programs?" asked Dean Jacobson, who in 2000 started BoDeans Baking Co. in Le Mars with his wife, Bo.
With the help of $250,000 in grants and loans from the state during the past five years, BoDeans has grown from 23 to 150 employees. The sugar cone manufacturing company now has a payroll of roughly $3 million and is considering a $6 million expansion.

The company would have located in Chicago if state incentives hadn't been available, Jacobson said.

Millions of dollars in local and state tax revenue that every year exceeds the state's initial investments in property taxes alone would have been lost.

That's one of the problems with corporate welfare: the reporters can find the recipients, because the Department of Economic Development likes to take credit for the "jobs" created. But that money doesn't just come from thin air - it comes from the rest of us, leaving everybody else with a little less to spend, and in aggregate costing at least as many jobs, at least as much growth. Unfortunately, nobody calls a press conference when a business closes, leaves or doesn't locate here in the first place because of our high individual tax rates, our highest-in-the-nation corporate tax rate, and the byzantine complexity created by 200+ special breaks.

If this stuff really worked to improve Iowa's economy, you'd expect it to show up in the statistics. With 200+ separate tax breaks, you'd think we'd be a dynamo of new business startups and growth. But in real life we're 42nd on the Small Business Survival Index, 45th on the list of economic dynamism and dead last in growing young companies.

Two opinion pieces in the Register yesterday unintentionally highlight why it's so hard to fix the problem. A left-side piece by Charles Bruner and David Osterberg shows why businesses are reluctant to give up loopholes:

"Economic development" tax credits have grown much faster than general-fund expenditures in recent years, contributing significantly to structural weaknesses in Iowa's revenue system. Business tax incentives are projected to exceed $405 million in fiscal year 2010 - up 350 percent in just five years. These always deserve greater scrutiny, but especially in tough times.

They're right to point out that this is just spending. Unfortunately, they don't want to save money; they just want to spend it elsewhere:

At the federal level, noted economist Mark Zandi, who advised Sen. John McCain's presidential campaign, has cited the value of federal economic boosts by making direct transfers to low-income people and providing support to states for services and infrastructure projects. Such expenditures, according to Zandi, generate $1.36 to $1.73 in economic activity for every dollar invested.

It's the Younkers sale approach to the economy: the more you spend, the more you save!

On what passes for the right side of the spectrum, Ed Failor, President of Iowans for Tax Relief, the pre-emiminent state loophole lobby, says:

The budget mess needs to be cleaned up, and a quick fix will not work. Some lawmakers will choose to take the quick way out by suggesting the elimination of federal deductibility. Federal deductibility allows you to fully deduct all of the tax payments you have made to the federal government on your Iowa income-tax return.
If politicians take away this right, you will pay Iowa income tax on money that was withheld from your paycheck. You will be taxed by Iowa politicians on money you never had in your hands. Paying a tax on a tax is simply not fair.

It's what's in the cigar box that matters at the end of the day, not how it gets there. If the deduction for federal taxes were simply built into the rate structure by lowering Iowa rates by the amount of the federal tax benefit, the same amount would be left in your cigar box. More, actually, as every year some ill-advised or ill-starred taxpayers lose the benefit of federal taxes on the Iowa return because their federal tax payments are made in a year when they don't have Iowa taxes - for example, the year they move to Florida to escape Iowa's high tax rates (and blizzards). But the loophole lobbyists insist that we keep the loopholes in place to keep our taxes low, rather than switching to a broad-based, low-rate system. That's like clinging to your wheelchair instead of mending your broken leg.

If the legislature really wants to do something to make Iowa attractive, they should repeal the corporate income tax along with all of the loopholes. They should lower the individual rate and broaden the base by getting rid of the 200+ economic development exemptions and yes, federal deductibility. But that's not what they want. Nobody makes campaign contributions because they want low rates. They give money to legislators who enact loopholes just for them, so that's what we get.

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