Does Iowa know when to walk away?

You can almost hear Kenny Rogers singing in the background: “Know when to walk away, and know when to run.”

Peter Fisher
Peter Fisher

There’s Texas Hold ’Em,” and then there’s “Iowa Fold ’Em.”

Wouldn’t you just love to play poker against the folks who run this state?

They never call a bluff. Companies come calling with demands for tax breaks and big checks, or they’ll build somewhere else. And Iowa just happily falls in line with the demands. You can almost hear Kenny Rogers singing in the background: “Know when to walk away, and know when to run.”

The latest: Today the board of the Iowa Economic Development Authority (IEDA) is scheduled to consider sweetening its already generous offer to Orascom — $35 million to build a $1.3 billion fertilizer plant in Lee County — to about $110 million with a slew of new tax credits. As The Des Moines Register points out today, that’s $110 million for 165 “permanent” jobs paying on average $48,000 a year, plus construction jobs that will be gone when the project is finished.

The state tax credits are in addition to the enormous benefit the state is providing by allocating federal tax-exempt flood recovery bonds to this project. If the interest rate difference — between taxable and tax-exempt bonds — were 1 percentage point, the company would save $320 million in interest payments over the life of the $1.2 billion bond. That would bring the firm’s total benefits to $2.7 million per permanent job, a truly astounding number. Even without considering the federal interest subsidy, the state tax credits would total $687,500 per job, many times the typical level of subsidy in deals such as this.

There are no estimates available about the potential environmental costs that will be caused by this plant. Since Iowa does a poor job of monitoring for pollution damage, those ongoing costs might be low, but if there is an accident, it could be costly.

The Register also quotes Debi Durham, head of IEDA, that incentives wouldn’t be needed if Iowa were to reduce corporate income tax rates. Nonsense. Research has shown repeatedly that this is a myth, and that in fact, Iowa’s income taxes paid by corporations are competitive with other states. In many cases, giant corporations are paying not a dime in income tax yet getting huge subsidy checks from the state to do things they would do without incentives.

This hand is the one we are dealt from years of unaccountable economic development strategies by Iowa state government.

Time for a fresh deck.

Posted by Peter Fisher, Research Director

Iowa Development Waters Still Safe for Pirates

Anti-piracy provisions newly incorporated into Iowa’s TIF law need to be implemented for all economic development subsidies.

Peter Fisher
Peter Fisher

The Iowa Economic Development Authority (IEDA) just announced that it has awarded $304,000 in state tax incentives to Putco Inc. to move from Story City to a location about 35 miles away in Polk County. The Polk County Board of Supervisors will hear a proposal on Wednesday that the board add $363,000 in tax abatements to the incentive package.

Why is the state helping to finance the piracy of jobs from one place to another in Iowa? This is not economic development for the state, and in fact appears to be counter to any reasonable interpretation of state law.

The Iowa Code, Chapter 15A.1 (2), dealing with economic development, states that “funds should not be used to attract a business presently located within the state to relocate to another portion of the state unless the business is considering in good faith to relocate outside the state or unless the relocation is related to an expansion which will generate significant new job creation.”

According to  The Des Moines Register, the alternative under consideration by Putco, a manufacturer of car and truck accessories, was a new site in the Story City area, not out of state. Furthermore, the IEDA project report shows no “jobs retained,” as there would be if an out-of-state move had been threatened.

And the new jobs to be created? Five. Over the past 10 years, almost 84,000 new jobs were created every year by establishments expanding in Iowa. Against that number, how in the world can five jobs be judged a “significant” addition?

As the Iowa Fiscal Partnership has argued previously, the “new jobs” exception in Iowa’s anti-piracy statute is so vague as to constitute a loophole large enough to drive a moving van through. In fact, the Iowa Legislature apparently agreed with this assessment. The Tax Increment Financing reform bill passed by the General Assembly and signed by the Governor includes an anti-piracy provision devoid of any job expansion loophole; a move is a move.

Firms will still move facilities from time to time, but they need not be subsidized by taxpayers to do so, as was the case with the $18 million or more provided by Coralville to entice Von Maur away from another location in Johnson County. Such moves won’t be subsidized by TIF subsidies anymore.

Unfortunately, the basic anti-piracy statute that applies to all economic development subsidies, quoted above, was not amended, leaving state agencies and local governments free to interpret “significant job creation” as loosely as they please, for any subsidies other than TIF. One wonders what the folks at IEDA feel is the limit. Three jobs? One job? Given the rather wobbly record of firms receiving state incentives in the past — job creation targets are often not met — it is quite possible that in the end this move will result in no net increase in jobs at all, above the 40 currently employed in Story City, or even a loss in jobs if the new facility is more automated and firm sales fail to meet expectations.

So it appears that taxpayer-subsidized piracy is alive and well in Iowa. The restrictions newly incorporated into TIF law need to be made part of the general law on economic development subsidies. If property tax payers should be protected from such abuse of public funds, why not state taxpayers generally?

Posted by Peter S. Fisher, Research Director

The Tax Foundation’s indefensible mish-mash

What the “State Business Tax Climate Index” offers is, at its core, an indefensible mish-mash of “Stuff the Tax Foundation Doesn’t Like,” which should be the title.

Peter Fisher
Peter Fisher

The Tax Foundation’s 2012 State Business Tax Climate Index is out, and not much has changed — including the political talk about it.

What this annual release offers is, at its core, an indefensible mish-mash of “Stuff the Tax Foundation Doesn’t Like,” which should be the title. Instead, the group slaps the term “State Business Tax Climate Index” on it, adds its slick logo and pretends the whole thing has meaning. For an ideological message, it may, but for decisions on business locations and expansions, not so much.

Problems with the methodology of this “index” are outlined in my 2005 book, Grading Places, published by the Economic Policy Institute. Much of the latest Tax Foundation (TF) report reads verbatim from earlier versions.

The Tax Foundation rests on contradictory messages. First, it claims that taxes paid make a difference in business decisions or growth, selectively citing literature to back the claim, despite a preponderance of evidence that taxes matter little. Then, it produces an “index” that has little relation to what businesses actually pay. In some cases, lower taxes actually produce a worse score on the index.

Rather than measuring what businesses actually pay, TF instead focuses on selected characteristics of the tax code while ignoring significant features. Results differ wildly from a ranking based on what businesses pay in many cases. This is because of the TF emphasizes rates of tax, without considering the base to which those rates apply. This feature penalizes Iowa, which in fact is a low-tax state for business; according to Ernst & Young, only 18 states have lower overall state and local taxes on business.

In other words, if a state — like Iowa with its single-factor apportionment formula — holds down the base on which tax rates apply, the Tax Foundation ignores the impact on actual taxes paid because it doesn’t like the rate structure.

Ironically, the report penalizes states that offer tax credits, which TF views as harmful to the business climate, a defensible position because it creates an uneven playing field for competing businesses, and jeopardizes critical public services that benefit businesses and their employees. But tax credits have strong lobbies in the Legislature. When the anti-tax politicians crow about Iowa’s low ranking in this report, something tells me that is one part of it they will not mention.

Like the Tax Foundation, they will stick with anything that backs the message they want to share, rather than examine the real issue of effects on business.

Posted by Peter S. Fisher, Research Director

Case is compelling to reform TIF

Another public TIF reform meeting is scheduled Saturday, Jan. 21, from 10 a.m. to 11:30 a.m. at the Johnson County Health and Human Services Building, 855 S. Dubuque St. Iowa City.

Peter Fisher
Peter Fisher

A consensus seems to be developing to reform tax-increment financing, or TIF. This represents an understanding that responsible use of taxpayer funds is not a partisan issue. The iron is hot for reform, now.

And it is reform that we’re talking about, not elimination of TIF, as some fear. Reform is the case I have made in a recent report for the Iowa Fiscal Partnership about TIF use in Johnson County, and in a public presentation on that issue recently in Coralville.

Another public TIF reform meeting is scheduled Saturday, Jan. 21, from 10 a.m. to 11:30 a.m. at the Johnson County Health and Human Services Building, 855 S. Dubuque St. Iowa City, conference rooms 202B and 202C, second floor. There is public parking on the north side of the building; enter through NW door near the flagpole.

For reform to be meaningful, we need to do more than tinker around the edges with TIF. Fundamental issues need to be understood and addressed.

Let’s start by recognizing that providing subsidies (some say “incentives”) for retail development is simply bad public policy. They are either unnecessary or counterproductive. Retail development occurs when the market for retail justifies it; potential sales are all the incentive that is needed, and that is driven by location. A subsidy, provided through TIF or another means, is really a giveaway of taxpayers’ dollars.

Next, providing infrastructure to accommodate growth is what cities do. They should not need schools and counties to help in most cases. Many city projects are appropriately financed by issuing bonds, repaid by the city’s taxpayers.

Third, once a TIF project is paid off, cities still may have the district in place and often can find a way to keep diverting property taxes from the school district and county. This can be millions of dollars. A sensible law would require the TIF to end with the completion of a project, so that schools and counties are not denied their share of the increased value created in the TIF district.

Beyond those fundamental problems, TIF law in Iowa permits:

• Piracy of businesses from one community to another, even next-door neighbors, as Coralville is doing with over $18 million in breaks to encourage Von Maur to move from Iowa City.

• A shift of responsibility from residents to nonresidents to pay the taxes needed to provide city services.

• A city to cause residents of one school district subsidize tax-base improvements in another.

TIF reform may take many forms in this legislative session, but no TIF reform package will be sufficient unless it firmly deals with the issues noted above.

Posted by Peter S. Fisher, Research Director

Note: A related guest opinion from Fisher is in the January 19, 2012, Iowa City Press-Citizen.

It’s not theater: ‘The Pirates of River Landing’

Total up-front project cost: $16 million to $17 million plus infrastructure. The city’s share: at least 75 percent. In the economic development world, that is an astounding fraction. That’s even larger than Iowa’s scandal ridden film tax credit.

Peter Fisher
Peter Fisher

The Coralville City Council recently approved an astounding incentive package to entice Von Maur from Iowa City’s Sycamore Mall to Coralville’s Iowa River Landing project. The city has agreed to build a $9.5 million store for Von Maur. It doesn’t matter how well your store is doing; if someone offers you free rent in perpetuity, that gets your attention.

But the $9.5 million is only half the story. The city also agreed to:

  • give Von Maur the $1.5 million building site for $10,
  • pay $650,000 to buy out the company’s lease at Sycamore Mall,
  • pay all of Von Maur’s expenses of moving from the mall to Coralville, and
  • pay all of the cost of constructing necessary streets, sidewalks, parking lots, landscaping, street lighting, water, sewer and storm sewers associated with or needed by the store.

And that’s still not the end. This was a TIF deal, where the rationale is that you are creating tax base, in the long run.

Well, guess what happens to most of the tax revenue — the city rebates it to Von Maur, with no ending date, because this TIF is in a “blighted area,” which means the TIF goes on forever.

So I guess the day after perpetuity, the schools and the county will start collecting all the taxes normally due them from this project.

The property tax deal caps Von Maur’s liability for property taxes at $150,000 per year (inflated each year by the consumer price index or 2 percent, whichever is less). If you take the building cost and add the land value you get $11 million. Then throw in another $1.0 to $1.5 million for the value of interior improvements made by Von Maur that count as part of the real estate, and you get a taxable value of about $12.2 million. At the current total property tax rate in that area of $36.57 per thousand, that is about $450,000 per year for a total property tax bill.

Under the agreement, Von Maur pays only $150,000, the city pays the remaining $300,000. There is no time limit on the cap. But if we assume that the store will have an economic life of 20 years, we can calculate the present value equivalent of giving them $300,000 a year. It’s about $4.5 million (using a 3 percent discount rate). You could argue about the time frame, or the discount rate, or about how much faster property taxes will go up than the 2 percent limit on the cap (which means the rebate amount will increase).

But you will in the end come to the conclusion that the tax cap is worth a lot — $4 million to $5 million. That is, giving Von Maur $4 million to $5 million up front would be worth about the same as giving the company $300,000 a year for 20 years. That means the total incentive package is worth at least $16 million (9.5 + 1.5 + .65 + 4.5). “At least,” because that figure doesn’t include all of the city infrastructure costs, which will be substantial, or the moving costs. Von Maur, meanwhile, has to come up with just the cost of finishing the interior space to its specifications, an expense that is likely to be in the $3.5 to $4.5 million range, plus $150,000 in property taxes each year, and its share of maintaining the common property (mostly parking lots).

Total up-front project cost: $16 million to $17 million plus infrastructure. The city’s share: at least 75 percent. In the economic development world, that is an astounding fraction. That’s even larger than Iowa’s scandal-ridden film tax credit, which briefly promised “half-price filmmaking” before the program was shut down. In addition to covering three-fourths of the up-front costs, the city will pay two-thirds of the annual property tax bill.

Coralville Council members — perhaps soon to be known as the Pirates of River Landing — apparently think this is a wise use of taxpayer funds. We can hope that the taxpayers of Coralville have a more sensible view of the world.

Posted by Peter S. Fisher, Research Director

Iowa’s already competitive tax system

Lawmakers often hear — and voice — complaints about the competitiveness of Iowa’s tax system. In fact, Iowa’s taxes on business already are very competitive.

“Pay no attention to that man behind the curtain!”

So said the Wizard of Oz, to distract his visitors from how he was manipulating them.

Well, thank goodness for Toto’s work in exposing the fraud.

Likewise, IPP’s Peter Fisher and others doing real research have exposed the myths about corporate taxes in Iowa that justify every political claim of a supposed need to reduce taxes on business. The fact is, it’s simply not a problem, as noted in the Iowa Fiscal Partnership backgrounder, “Iowa’s Businesses Already Are Taxed Lightly.”

Few States Tax Businesses Less Than Iowa

State Corporate Income Tax: Percent of Private-Sector GDP — Comparison to U.S. Average

Few States Tax Businesses Less Than Iowa — State Corporate Income Tax: Percent of Private-Sector GDP

Sources: IPP analysis of data from the U.S. Census, State Government Tax Collections; and the Bureau of Economic Analysis, Gross Domestic Product by State

Lawmakers often hear — and voice — complaints about the competitiveness of Iowa’s tax system. In fact, Iowa’s taxes on business already are very competitive. Whether one focuses only on the corporate income tax (above and linked here), or the whole range of taxes falling on business, Iowa’s state and local taxes are well below average, and have been for some time. (See state and local ranking of all states)

Iowa’s corporate income tax in recent years has been considerably lower than the national average level of taxation and lower than all but 11 states. The best summary measure of the level of corporate income taxation from one state to another, that takes into account all features of the tax code, is the amount of tax collected as a percent of the private economic activity generated in the state, as measured by state private sector GDP (gross domestic product).

In Iowa, this fraction fell from 0.31 percent in the mid-1990s to 0.24 percent over the last five fiscal years, as shown in the graph above. On this measure, Iowa’s rank among the 50 states fell from 36th to 40th. (For the most recent year, 2009, Iowa ranked 36th.) In both periods, Iowa taxed well below the average for all 50 states. Similarly, the conservative Tax Foundation found that Iowa ranks 43rd among the states in its level of corporate income taxation, measured as corporate taxes paid per capita on average for fiscal years 2004-2008 (and 36th for 2008).

See our two-page backgrounder on this issue at www.IowaFiscal.org.

Posted by Mike Owen, Assistant Director

Get budget rhetoric in line with reality

In Iowa, budget rhetoric is what’s been out of control. Politicians have manufactured a crisis, when we need budget discussions to be based on logic and facts, not scare tactics.

David Osterberg
David Osterberg

Now that we have a new state budget in place that was balanced in a cuts-only approach, we at least can finally all agree that state spending in Iowa is down.

Even before the new budget was passed, the general fund budget was smaller in relation to the Iowa economy than it was when Gov. Terry Branstad was last in office in 1998.

In other words, state spending has not kept pace with the growth in wages and business profits over the past dozen years. This shifts costs to Iowa citizens.

One example is in the Regents universities. In the just-ended fiscal year, the state provided fewer dollars to the University of Iowa than it did in 1998. By not adjusting state funds for inflation, tuitions have been forced higher: 227 percent up since 1998, from $1,333 per semester to $4,357.

In Iowa, budget rhetoric is what’s been out of control. Politicians have manufactured a crisis, when we need budget discussions to be based on logic and facts, not scare tactics.

When we do that, we can see that Iowa can afford to provide preschool for every Iowa 4-year-old, because we know it improves education and economic opportunity across the board. We can hold down the rapid increases in tuition at Kirkwood and the University of Iowa. We can mow the grass in our parks, improve the low salaries of our teachers and nurses, and do much more while keeping spending at or below 1990s levels.

What we can afford to cut are the perks for the profitable. Tax cuts for big corporations that already avoid their fair share of the bill cannot be sustained if we want to provide and maintain superior state services that attract residents and a productive workforce — which, by the way, is how companies make money.

Let’s put the old budget rhetoric on the shelf and invest in Iowans as we once did, for a dynamic economy and services in line with Iowa values.

Posted by David Osterberg, Executive Director