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Iowa legislators debate need for tax incentive programs, and their effectiveness

by Laura Tomaka ~ January 2018 ~ Stateline Midwest »
In August, Apple Inc. announced that the company would locate its new data center in Waukee, Iowa. The technology giant will receive more than $200 million in state and local tax incentives to build the $1.3 billion facility on a 2,000-acre site in the Des Moines suburb.
The announcement has helped fuel the debate over the use of tax incentives to lure businesses. Earlier in the year, gaining a better understanding of the return on the states’ investment in tax and financial incentive programs became an issue during the legislative session as lawmakers struggled to address revenue shortfalls and balance the state budget.
In its last complete Tax Expenditure Study, released in 2014, the Iowa Department of Revenue found 373 tax credits, exemptions, deductions and exclusions in effect for individuals and businesses in Iowa, resulting in more than $12 billion in foregone revenue for the state.
The report also shows about $346 million in tax credits to companies and individuals, about 43 percent of which are incentives to companies doing business in the state.
“Iowa’s spending on economic development tax incentives is the fastest-growing part of state spending,” Sen. Joe Bolkcom says. “This spending is not sustainable.”
The desire to assess the impact of incentives, and the growing demand to hold businesses accountable for delivering on promises of increased economic activity, has led some states, including Iowa, to review their business incentive programs.
According to a Pew Charitable Trusts’ May 2017 report on the evaluation practices of state business incentives, more than half of states have made progress in collecting better information allowing for assessments of economic development incentives. Of those, researchers pointed to 10 that “excel” in rigorous program measurements — including Indiana, Iowa, Minnesota and Nebraska — because of their plans to regularly evaluate tax incentives.
Researchers also indicated that more-frequent legislative hearings on evaluations could help lawmakers better use the information to inform the decision-making process.
Bolkcom agrees.
A member of the Iowa Legislature’s 10-member Tax Expenditure Committee (comprised of five legislators from each chamber, and required by statute to review each program at least once every five years) that reviews the state’s incentive programs, he says the committee meets once or twice a year “to do a cursory review of how the credit works.”
“There is very little analysis or measuring our return on investment,” says Bolkcom, who co-chaired the committee from 2012 to 2016. “Many of our tax credits are complicated. We need a standing committee that meets regularly during the legislative session to thoroughly review this spending, just like we do for all other state appropriations.”
Rep. Zach Nunn, who also serves on the Tax Expenditure Committee, says Iowa should continue exploring tax incentives and reforms “that stimulate the economic growth while preserving key investments in the state’s public sector.”
Bolkcom, however, is reluctant to rely on tax incentives to attract businesses to the state.
“The Apple award of $200 million in state tax credits is an example of tax credits on autopilot,” he says. “[Apple] was coming to Iowa … the tax credits were icing on the cake.”
Nunn points to steps lawmakers have taken in areas such as education, workforce training and property tax and workers’ compensation reform. And he agrees that the debate on incentives to attract businesses, in ways that protect the state’s finances and result in economic growth, will continue.
“Is it fewer incentives and credits and instead an overall lower tax rate? Or are the targeted incentives and credits the best plan going forward?” Nunn says. “That’s all on the agenda going into 2018.”

 

Article written by Laura Tomaka, staff liaison to the Midwestern Legislative Conference Economic Development Committee.