States for years have competed with one another to lure jobs. Seeing that each year there really are only a few hundred bona fide deals nationwide and thousands of communities and development organizations chasing these projects, it is no wonder why the states desire to come up on the winning side.
To draw an analogy, why is a professional baseball organization willing to shell out millions of dollars to sign the latest hot free agent outfielder who can slug 40 home runs? Answer: to sell tickets and win ballgames, which attracts more “green” to the ball club’s owner.
A similar perspective applies to economic development prospects. Attracting a company which brings, say, 200 good-paying jobs to your state, with employees who pay taxes, buy homes and put kids in schools while buying goods and services – this is called a multiplier effect. So communities and states generally extend themselves to attract such opportunities.
In recent years, however, as states have experienced tighter budget constraints, there has been an increased amount of scrutiny over how states are divvying out taxpayer funds for this purpose. The term “corporate welfare” is commonly thrown out as a way for critics to position incentives in the worst possible light.
So how does Iowa rank relative to other states related to incentives?
The Iowa Chamber Alliance, which represents the 16 largest Chambers of Commerce and economic development organizations throughout Iowa, has recently stepped up to the plate to shed some light (and data) on this topic. Unless facts are presented there just is no way to have a sensible debate. To that end, the Chamber Alliance’s study was completed and conveyed to the Iowa Legislature in March 2013 with the assistance of Deloitte Consulting, called “Benchmark Comparison of Iowa Incentives”.
The study examined Iowa’s incentives in comparison to those offered by Minnesota, Nebraska, South Carolina, South Dakota, and Texas. Iowa competes regularly with several of these states on projects. Further, several states are renowned for offering strong incentive packages to lure jobs.
As one incentive tool, Iowa is behind the other states relating to corporate tax exemptions. Iowa companies pay little to no income tax if customers are out of state. Companies with in-state customers, however, face a very high tax burden. The companies most affected are those firms that produce or supply products to Iowa manufacturing companies who then sell products to customers in other states. The Iowa Economic Development Authority has attempted to address this issue lately with the Iowa Legislature.
Regarding another issue, Iowa does provide sales tax exemption on utilities used in manufacturing; however, the sales tax refund for construction materials is only available through certain programs, minimizing the available impact to all businesses. Nebraska and Texas provide a higher level of exemption flexibility than does Iowa.
Perhaps the area that gets the most attention nationally is what is called a “deal closing fund”. These are discretionary funds given by a state to seal a deal, and are typically sought by corporate investors due to flexibility and the immediate impact on upfront project costs. Iowa allows the company to go through a competitive application process, but other than Nebraska, Iowa is the only state NOT to have a deal closing fund.
The lack of a deal closing fund can be frustrating for Iowa in cases where the state has done everything it can to close the deal, except for having a few extra dollars to land the project which another state might have. Texas and South Dakota are two states which stand out in this regard, Governor Rick Perry of Texas in particular being noted for his aggressive approach to recruit businesses out of other states.
The debate over the value of incentives to land businesses is unlikely to go away anytime soon. But in the interest of public education and transparency, there is a strong need to know the value of these incentives and to understand whether the public is getting their money’s worth in such deals. Nonetheless, the Iowa Legislature would be wise to evaluate such studies and determine how Iowa can compete most effectively to attract the few high-value businesses looking to expand in 2014.