Tax incentives vs. tax freedom: Which spurs economic growth?

Attracting business to your state is key for economic growth and the job creation that comes along with it. While local governments often find it attractive to offer incentive packages, including subsidies and tax abatements, such programs come with a number of undesirable consequences. If local governments in Iowa want to see stronger economic growth over the long term, it is better to lower the property tax burden than to constantly chase the next development deal.

Property taxes have surged over the past two decades in Iowa, increasing close to 110%, which far outpaces population growth and inflation. In Fiscal Year 2025, for the first time in state history local governments collected over $7 billion in property taxes. Local government spending is a major driver of this growth. According to the Tax Foundation, Iowa has the ninth highest effective property tax rate in the nation.

Research has found that taxes are a major driver of migration. States with freer tax environments, including lower property taxes, are likely to see more residents flowing into their state. And those residents bring with them the skills and talents that drive sustainable growth.

Local governments across the state are critical of recent property tax reform proposals, claiming they would restrict their ability to spend. On average in this past year city property tax collections have surpassed over 6 percent and counties have grown over 7 percent. School districts, the main driver of property tax bills, have increased over 5 percent.

In particular, local government officials are concerned that potential future reforms might not only slow the growth of their spending, but also force them to curtail various economic incentive programs.

As an example, the city of Cedar Rapids has approved what is being described as the “largest economic development project in city history.” The project centers around a data center campus, which will invest $750 million, while the city will provide $529 million in tax rebates. It is estimated that $1 billion in property taxes will be generated as a result. In addition, it is estimated that 500 construction jobs will be needed over a ten-year period. Part of the agreement also requires the data center must create 15 high quality jobs per phase of the project.

In West Des Moines, a water park and conference center development, is being “ offered one of the biggest financial incentive packages” by the city. The project is a $400 million and the incentive package consists of $85.5 million in property tax rebates “in addition to two-sevenths of the hotel/motel sales taxes collected from the water park hotel for a period of 20 years.”

Local officials argue that these economic incentive packages will not only pay for themselves in the long run but also spur economic activity in the short run.

Yet these economic incentive packages often fail to deliver on their promises. While they undoubtedly benefit the beneficiary, they are costly for the taxpayers who must shoulder the burden, and they narrow the tax base. Further, research suggests that incentives fail to improve the entrepreneurial environment. Big businesses may benefit at the expense of small business and less vigorous patent activity.

Policymakers cannot tax and spend their way to prosperity. The good news is that they can create an environment that would nurture prosperity. The same research just cited suggests that increasing economic freedom, which includes lowering taxes and spending, would create the conditions for entrepreneurship to flourish.

Incentives may lure developers and data centers, but Iowa’s high property tax situation should be a “fire bell in the night” for local government officials. High property taxes will deter economic growth. They will discourage new residents, entrepreneurship, and force people to leave.

The solution for creating economic growth must be based on policies that lower taxes and spending and remove barriers to entrepreneurship. This is why property tax reform is crucial. For too long property taxpayers have been sidelined and it is time that they become the beneficiary of some needed tax relief.

John Hendrickson is policy director for Iowans for Tax Relief Foundation and Meg Tuszynski is Research Assistant Professor & Managing Director, Bridwell Institute for Economic Freedom at Southern Methodist University.