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Iowa's poor business tax climate: why tax credits don't help

October 14, 2009

There are two basic approaches to using state tax rules to attract businesses. One is to have a low tax rate with a broad base and simple rules. Or you can have a high tax rate, but use targeted tax breaks, start-up incentives, and tax credits to attract "targeted" businesses. Iowa takes the second approach, and the result is the fifth-worst ranking in the current Tax Foundation Business Tax Climate Index.

We asked Kail Padgett, one of the authors of the index, why Iowa scored so poorly in spite of having over two dozen busines tax credits. The answer:

The tax credits actually count against Iowa in terms of its business tax climate. Tax credits are symptomatic of an underlying problem in the tax structure. A state shouldn’t need to entice businesses with incentives. A neutral tax code with lower rates and broader bases provides a sound business environment.

North Carolina is just facing up to the problems with these credits:

Do government incentives aimed at luring businesses to a state or city work?

There’s already a body of evidence that they often do not. And news out of North Carolina this week shows just how quickly these headline-grabbing deals can go awry. While the business press on Dell Computers this week focused on its new smart phones and $3.9 billion bid for tech services provider Perot Systems, in North Carolina the news on Dell was all about the closure this coming January of its plant in Forsyth county. The move will put 900 people out of work. And it’s doing collateral damage to the local incentives system that offered the Texas-based computer maker $280 million in potential tax breaks and grants to locate the plant in the state four years ago.

(via Knowledge Problem)

David Brunori chimes in from Tax.com:

The lesson is stark. Tax and other development incentives are no guarantee that a company will do what they promise they will do. Dell is closing the plant for business reasons. And those reasons are simply that it can't make money despite the state's generous offer.

Far better to have low rates for everyone than to try to have the venture capital supergeniuses at the Iowa legislature and the Iowa Department of Economic Development decide what the "right" businesses are.