Are tax incentives an effective economic development tool?

Diamond V Mills plans a $30 million expansion at its Cedar Rapids's plant. In return for the 17 jobs and 56,000 square feet it's adding, the state of Iowa will give the company $1.8 million in tax benefits.

This is the third tax incentive package the company has received since 2008.

“But we looked at other locations to expand the business,” said Jeff Cannon, president and CEO of Diamond V, a Cedar Rapids producer and marketer of animal nutrition products. The facility is at 2525 60th Ave. SW.

Before ultimately settling on Iowa, Diamond V looked at various states' incentive programs and evaluated the different support offered.

“We decided on Iowa after we looked at the state support programs, property tax relief, state investment credits, job training, sales tax exemptions of certain equipment and low interest loans,” he said. “Each state has its own cocktail, if you will, and Iowa's is very competitive.”

Tax credits and other incentives are used to lure in out-of-state businesses or given to Iowa companies seeking to expand. Business groups say they are an effective tool needed to compete regionally and nationally as other states offer similar incentives - or in some cases more.

These types of incentives helped Lee County land a $1.4 billion fertilizer project and secured another $1.7 billion investment by CF Industries in a Port Neal plant near Sioux City – the state's largest ever capital investments.

Last year, the Iowa legislature raised the cap on state economic development tax credits, from $120 million to $170 million. The cap was put into place in 2009 when the state's finances were struggling.

But how effective are tax incentives?

Making Iowa competitive

“We use (tax credits) to address the areas where Iowa is uncompetitive,” said Debie Durham, director of the Iowa Economic Development Authority.

Durham said the state's corporate income tax rate ranks 49 out of 50, and those tax credits give Iowa a more level playing field.

The Economic Development Authority uses a variety of tax credit programs and direct financial assistance, but relies heavily on several programs, including the High Quality Jobs Program and Enterprise Zone Program:

• The High Quality Jobs Program is a package of tax credits, exemptions and refunds given to businesses locating, expanding or modernizing their facilities in Iowa. In return for the incentives, the businesses must provide a certain number of high-paying jobs.
• The Enterprise Zone program is a tax benefits given to businesses that invest in economically depressed areas. Businesses locating or expanding in an Enterprise Zone can receive property tax exemptions, funding for employee training, sales tax refunds, Iowa income tax credits or other tax incentives.

Durham said the state gave out $223 million in total incentives, including tax credits and direct payments, last year, which is substantially lower than Illinois, which gave out $1.5 billion, and Nebraska, which distributed $1.39 billion.

“Obviously Illinois is a bigger state,” she said.

Iowa Department of Revenue projections show a slight upward trend on potential tax credit claims over the next five fiscal years. About $15.2 million in tax credits were claimed under the High Quality Jobs Program in 2013, and the Department of Revenue forecasts that number to rise to $24.5 million by 2018.

Likewise, the Department of Revenue anticipates the number of tax credits claimed under the Enterprise Zone program to climb from $7.6 million in 2013 to $10.6 million in 2018.

“We manage them in a fiscally responsible manner,” Durham said, explaining the state monitors the company for five years to make sure it creates the number of high-paying jobs and meets other obligations it says it will.

Accomplishing their goals?

But an October 2013 study published in the Journal of Regional Science that examined the possible benefits to states that offer manufacturers tax incentives receive, and determined there is no measurable gain.

The study looked at the value added for 15 manufacturing sectors in 20 states during the 1990s, said Rick Funderburg, an urban and regional planning assistant professor at the University of Iowa and an author of the study.

"Taxes are part of the cost of doing business in the state," he said. "The business is willing to pay the cost in exchange for government services, business climate and infrastructure."

According to the study, "when the tax climate is properly measured as the potential liability arising from new investment in a state, we estimate that a 10 percent reduction in the effective tax liability is associated with a 3.5 to 5.3 percent increase in value added for the state's targeted manufacturing industry."

With a 4.5 percent increase in value added, if there is an equivalent reduction through tax incentives, or a 1.2 percent industrial growth.

With tax incentives for some businesses, other companies have to pick up the slack, Funderburg said.

“Tax incentives and direct financial assistance are intended to support business growth by encouraging economic development, investments in new facilities, research and job creation - new activity that would not have otherwise occurred. Whether these incentives accomplish those goals or are cost-effective remains largely unknown,” wrote Heather Gibney, a research associate with the Iowa Policy Project, an Iowa City-based think tank, in April 2013.

Gibney said that little legislative reform has resulted after the 2009 mismanagement of tax credits given to the Iowa film industry.

“It's hard to say if these are being used effectively because we don't know what's being done with the money and some spending, especially with the Research and Development tax credit, is getting out of control.”

Who got what

Corridor companies that have received more than $500,00 in tax credits from the Iowa Economic Development Authority since 2008 through the High Quality Jobs Program and Enterprise Zone Program. Figures may include more than one incentive package.

Diamond V Mills - $4.18 million over three expansions

Danisco U.S. - $4.06 million over three expansions

General Mills - $3.2 million

Intermec Technologies Corp. - $1.6 million

American Profol - $1.1 millions

Raining Rose - $705,171

Alpha Inc - $646,000

RuffaloCODY - $570,000

Source: Iowa Economic Development Authority