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Iowa extends deadline for tax credit review

December 03, 2009

Governor Culver needs more time to ponder what tax credits are all about. The Des Moines Register reports:

A review of Iowa’s tax credits has been extended by a week to give departments more time to conduct a comprehensive analysis, Gov. Chet Culver announced today.

Culver, last month, ordered a review of 30 state tax credit incentives in the wake of a criminal probe into Iowa’s film program, a dire budget forecast and an explosion in the tax breaks’ costs.

The credits are projected this fiscal year to cost the state $489 million in tax revenue, growth that has added pain to an already bleak budget forecast. Any programs deemed to have little or no return on taxpayer investments are likely to see cuts in the upcoming legislative session, lawmakers said.

They have an insoluble puzzle. By any conventional measure there is no return at all on these "investments." There's no way the state government earns more in taxes from corporate welfare recipients than it spends on the tax credits. As politicians hate to give up power, or admit they're wrong, they will use some nebulous "jobs created or saved" measure and deem most of the tax credits wonderful. They will pass up the opportunity to scrap a failed system and replace it with something sensible.

Meanwhile, South Dakota shows how to do economic development without tax credits -- in fact, without an income tax at all. Russ Fox reports:

From the Leonard Letter and the South Dakota Department of Tourism and Economic Development comes word of a small firearms manufacturer named Bar-Sto Precision Machine. Located in Twentynine Palms (near Palm Springs), Bar-Sto makes auto-pistol barrels primarily for law enforcement. The company employs about 18 individuals.

But the continued increases in state taxes along with California’s high regulatory burden have impacted the privately held firm. Irv Stone, the owner of Bar-Sto, had enough. Instead of continuing in business at a lower profit margin he’s taking action. The business will be relocating to Sturgis, South Dakota.

"South Dakota is really a great place to do business," said Irv Stone, second-generation owner of Bar-Sto. “The differences in the tax climates between California and South Dakota are night and day, and we have been treated real well by the GOED (Governor’s Office of Economic Development) and the Sturgis Area Economic Development.

The 18 jobs are going to South Dakota despite Iowa's 30-odd economic development incentives. Low and simple taxes work better than high rates and "targeted" loopholes for smaller businesses. The small businesses are the ones that really generate jobs and growth, and they are the ones least able to negotiate a swamp of tax credits designed for companies with lots of tax lawyers and lobbyists.

Related: a Des Moines Business Record article where I discuss the uselessness of tax credits. Who speaks for the tax credits? A politician's spouse.