The real payoff

March 28, 2014 | 11:33 am

The Gazette Editorial Board

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Iowa economic development officials use a variety of incentives toward drawing new business to the state and helping existing businesses expand. From 2003 through June 30 of 2012, the state approved more than $1.5 billion in tax credits and cash assistance for more than 900 development projects, according to a Gazette review (see today’s page 1A story).

While acknowledging that some of those projects fail, state officials believe their efforts most often succeed and boost the state’s economy and job opportunities. They also insist that incentive packages are necessary to compete in today’s global economy.

Sounds good. But we, and many Iowa taxpayers no doubt, would like more documentation of the benefits of these incentives. Bottom line: Does the business and job growth produced generate enough new tax revenue from the assisted company and its employees to exceed the public money invested by the time the incentives end?

We don’t know for sure.

WHAT’S THE RETURN?

Yes, the state establishes requirements including the number and quality of jobs created and amount of private capital invested when it considers public incentives. And there is a compliance team that pursues collection of loan or grant money owed or a return of tax credits when the job goals aren’t met.

However, the bigger question concerns the deals that meet the state’s contract requirements: Do they “make the taxpayer whole,” as Iowa State University economist and scientist David Swenson puts it. In other words, what’s the return on investment of tax dollars?

Unfortunately, there’s nothing in place to make that kind of follow-up evaluation.

FRONT-END MODEL

During Gov. Tom Vilsack’s second term nearly a decade ago, state legislators mandated that the Department of Economic Development develop a tool to calculate the return on the state’s business incentives. A team of economists and other experts was assembled. “The model they designed was a before-the-fact screening tool,” Swenson told us. It reviewed the number of jobs a project would create, the worth of those jobs, and whether the project had the capacity to pay back the public.

“But the model never was designed to be an after-the-fact validation tool,” Swenson added.

Swenson said he and other economists in the state believe such a validation model could be developed and implemented.

In lieu of that, Swenson argues that publicly-backed incentives at the least should have objectives that are clear and measurable, and they should be reviewed by a state agency other than the Department of Economic Development (renamed the Department of Economic Authority since Gov. Terry Branstad took office in January 2011). He suggested the Department of Revenue, Legislative Services Agency or state Auditor’s Office player a bigger role because “they’re less partisan than the economic development office.”

It also requires more aggressive legislative oversight to work, he said.

Well, Tina Hoffman, spokeswoman for the Department of Economic Authority, said the front-end tool Swenson referenced has evolved to determine a “fiscal impact ratio.” Using a project’s goals of job creation, wage levels and capital investment, future tax revenue is projected “to help us understand the right balance of incentives” to award, Hoffman told us. “And we always shoot for a ratio better than 1-to-1, of course.”

NO ‘BACK END’ YET

But while the department tracks wage levels and jobs created by approved projects, there is no measurement process to evaluate overall impact on tax revenue produced vs. the state subsidies invested.

“We don’t do that well,” Department of Economic Authority Director Debi Durham told us last week. “We need to do that. It’s a bigger story for the taxpayer: what are the long-term implications.”

But change appears to be coming. Durham said her department has asked the Department of Revenue to develop a software program toward tracking and analyzing the “back end” impact of business incentives. The Department of Revenue handles the state’s taxes and related data. “By partnering with Revenue, we’ll get some sophisticated information, and I think we’ll be able to tell a compelling story and make better decisions based on better data,” Durham said.

She wants the revenue tracking system to be in place within six months.

In late January, Durham asked legislators to return the annual cap on business tax credits from $120 million to $185 million because of demands already in the pipeline that have a potential of $1 billion worth of investments by prospects. She noted that Iowa’s use of state tax incentives ranks low nationally, with our state spending $73 per capita.

Swenson and other critics question whether most of these tax incentives are necessary.

“You won’t find an academic economist anywhere” who would disagree that a lot of tax dollars are wasted on incentives, he said.

In fact, Swenson believes that if most of the business incentives were dropped and redirected toward improving the state’s infrastructure, worker skills training and quality of life initiatives, and then “advertise the heck out of what we have to offer,” that the state’s economic growth would be just as good or better and could attract more high-quality employers and jobs.

Perhaps. But until there’s a follow-up process that evaluates the long-term effectiveness of public subsidies for business development, how will we know?

A similar knowledge gap exists in evaluating the overall impact from the explosive use of tax increment financing by local governments in recent years. Legislators last year took a good step by requiring reports and collection of data from every local entity making use of TIF, beginning this month.

IS GAME WORTH IT?

Iowa already is ranked near the top nationally as a business-friendly and low-cost state to do business, according to major media outlets such as Forbes and CNBC. The state’s own website touts these rankings, even as Gov. Terry Branstad pushes for tax reforms even friendlier to business.

Yet Iowa is not unlike most states in continuing or stepping up its business-subsidy game, convinced that it must in order to be competitive and attract at least its share of expanding and new business.

But do these incentives and subsidies produce only a zero-sum game in the end? A net loss? Or do they really pay off?

We don’t know for sure. Iowa’s residents and taxpayers deserve to know. And we applaud Durham’s new effort to tell us.

Legislators should have demanded an objective measurement tool years ago. Now, it’s their job to make sure what emerges is credible and is applied to future policy decisions.

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