Iowa has a complex and extensive system of tax credits, all of which suffer from poor transparency and shaky justifications. We’re certainly not alone in this — whether it is Amazon, Foxconn, Apple, or other businesses, states are trying to outmaneuver one another to attract economic development using tax credits. The problem is, that according to overwhelming evidence from researchers across the political spectrum, the vast majority of these deals simply do not create jobs or economic growth that wouldn’t have existed otherwise.
That’s because businesses make decisions on where to locate new operations or grow existing facilities based on a whole range of factors, and subsidies rank very low in that calculation. Factors like the availability of customers, suppliers, workers, resources, infrastructure and utilities all outweigh subsidies. To see this in action, consider Amazon’s recent selection of New York City and northern Virginia for its “HQ2” facilities – the company passed up billions of dollars in much larger subsidy offers from other states to locate its new offices where they made the most business sense.
Of course, Iowa uses tax credits not only for economic development, but also for a variety of other purposes that include promotion of renewable energy and redressing socioeconomic inequalities. Regardless, all of Iowa’s complex and extensive system of tax credits impose costs on other taxpayers – and that cost is growing. From 2007 to 2019, tax credits have increased from $197.6 million to $422.9 million. This is a $225.3 million or 114 percent increase in just 12 years.
This trend is expected to continue. For instance, the Research Activities Tax Credit cost taxpayers $48 million in 2017. Within two years, that tax credit is expected to grow to $69.1 million, more than the $68 million projected cost of the Earned Income Tax Credit that supports low-income families.
Have Iowa’s taxpayers gotten twice the results from these programs that they did a decade ago? Are we better off subsidizing corporate R&D or families that are going through tough times? It’s time to find out, which is why we agree with Governor Kim Reynolds that tax credit reform should be a priority of the upcoming legislative session. The legislature has also signaled its intent to review tax credits as part of the tax reform begun in the last legislative session.
Iowa’s 12 percent corporate tax is the highest in the nation, even though that top rate will be lowered to a still-excessive 9.8 percent in 2021.,. A better solution to making Iowa a more competitive state is to work towards lower marginal tax rates for everyone. The Mercatus Center at George Mason University has estimated that by reforming business tax credits, Iowa could see further tax reductions on corporate, individual, and sales taxes by close to 2 percent.
The skyrocketing cost of the tax credits Iowa’s demonstrates that a taxpayer review is long overdue. If the legislature does nothing else, it should require more transparency on all tax credits, as well as stronger requirements for third-party review of the ridiculous “economic impact” calculations that justify so many of these deals. Iowa does have a tax credit review process, but it clearly needs to be strengthened to include more transparency and more independent analysis. If the taxpayers of Iowa are being asked to subsidize a business, then it’s only appropriate that they be given as much access to relevant information about the deal as any other investor.
But beyond transparency, it’s time for Iowa’s politicians and the voters who elect them to realize that the continued path to good jobs, economic growth and competitiveness isn’t from expanding tax credits or chasing high-profile deals. Rather, it’s through low and fair marginal tax rates, simple and reasonable regulations, and a commitment to making Iowa an attractive place for anyone to start and grow a good business that creates good jobs.