State tax credits are not investments for taxpayer

by Dave Swenson

We want our government to provide a mix of necessary public goods, and certainly most of us support our governments regulating air and water quality or overseeing the professional certification of health professionals, as examples.

We also want our government to produce improvements to society, either through infrastructure development, public health mandates, or human capital enhancements that improve our material well being or our lot in life. When they do, and when the benefits outweigh the costs, then government, given all other funding decisions, may be justified in allocating resources toward those ends.

Return on investment (ROI) lingo entered government legislation and rules in Iowa over the past decade and has now replaced or become confused with the much more precise benefits and cost-effectiveness evaluations of public decisions that have been employed for decades. The Iowa Legislature mandated ROI-type measures in an attempt to evaluate the worthiness of spending in support of economic development.

The language of ROI, however, is largely inappropriate to the vast majority of government decision making and ought to be scrapped.

Iowa's citizens are not “investors” in the case of tax credits, and they do not receive a “return” in a conventional sense. They do not hold an equity position, nor can they negotiate a sale of these so-called assets. To call them investors is at best a deception and at worst a fraud.

They instead incur higher average tax payments due to the application of the tax credit with little or any concomitant proof that over some reasonable period of time those tax payments are restored in full. There is virtually no research to suggest that Iowa taxpayers' positions are improved. The only evidence we have of improved positions are testimonials made by the recipients of the credit largesse or their agency administrators.

In short, there is precious little documented economic justification for most tax credit categories in Iowa. They are, instead, primarily political decisions designed to either mollify or promote special interests.

The use of the word “investment” has infiltrated government and policy rhetoric broadly. As it has evolved, government spending is a bad thing, but government investment can be a good thing if phrased just right. Accordingly, we invest in K-12 or higher education, roads, renewable energy development, and we pretend to invest in businesses, but we really don't.

Do we invest in prisons, food stamps, mosquito control, wastewater treatment, and treatment for chlamydia? Of course not, but given half a chance, someone will call any given category of traditional and essential public expenditure an investment in an attempt to sway views. Where does it stop?

One good place to stop involves the inappropriate and misleading use of terms that have little if any realistic value when evaluating public spending.

Traditional benefits and costs measures are still the gold standard for evaluating the worthiness of state policy and program decisions, and there are plenty of people in state government who are capable of conducting those kind of analyses.

Similarly, for activities that produce less tangible, but still important social outcomes, there are well-developed evaluation criteria to be employed that focus on

maximizing socially desired outcomes given all competing spending decisions that must be made annually by our political leaders.

Unlearning language is a hard thing to do, but unlearning return-on-investment expectations for public programming ought not be that hard if this is considered: The real financial professionals who use ROI language correctly to make major private financial decisions on a daily basis think the use of the phrase in government quite foolish.

They know better, and so should our elected public officials.

Dave Swenson is a professor of economics at Iowa State University, Ames.