Watching Your Tax Dollars Kum & Go: Iowa's Witless and Expensive Obsession with Capital Investment

(Thanks to ISU economist Dave Swenson for explaining why Iowans are not getting good value for our "economic development" dollars. These deals do not receive enough scrutiny. - promoted by desmoinesdem)

Dave Swenson

We have been sold a bill of goods for much too long: local and state economic developers and their willing political enablers have convinced many of us that their earnest economic development efforts are responsible for the state’s economic vibrancy in recent years.  It is a canard that serves them, some in the business community, and various political fortunes well, but for the rest of us, their collective economic and political incompetence creates unjustifiable distortions in exactly who pays and who does not pay for public services.

Increasingly in Iowa, new or expanding businesses are given tax-payment passes that can run into the hundreds of millions of dollars.  The most notorious recent instance has been well documented. The Orascom fertilizer plant, still under construction in Lee County and which I once labeled the worst Iowa economic development deal ever, was initially given around $245 million in state and local government tax incentives though it was only adding 165 jobs.  As the plant is now expanding beyond original plans, it came back to the Iowa Economic Development Authority (IEDA) this summer asking for and ultimately receiving an additional $25 million in future tax breaks while adding just 15 more jobs.  That now works out to $1.5 million of state and local taxes the company does not have to pay for each job at the plant.

Iowa’s continued questionable and profligate subsidization of capital development is also nicely exemplified in recent IEDA proceedings.  Eight different projects were awarded $25.5 million in tax credits, mostly under the state’s High Quality Job Program. The awards ranged from a very modest $30,875 for a firm called Cambridge Technologies, to a whopping $18.6 million for the omni-present Kum & Go convenience store chain.  Its award is for the construction of a new headquarters in the city of Des Moines a mere 13 miles east of their current headquarters in West Des Moines.  Plus, the City of Des Moines, who will most certainly oblige, has been asked for an additional $20 million in tax increment finance property tax rebates by the firm.  Kum & Go says it will add 90 jobs. While nowhere near as inane as the Orascom deal, this works out to about $430,000 in potential state and local tax subsidies for every new job at the Kum & Go headquarters. 

Here’s how these giveaways work: Firms are relieved of their state government and, almost always, large fractions of their property tax obligations in the future.  The subsidies can last from few years to up to 20 years in the case of property tax rebates.  Though relieved of most of their state and local taxes, the firms and their employees still demand and receive public goods.  They use the roads, their children go to public schools, and they consume a normal bundle of public services just like every other business and household.  But the subsidized businesses get a pass on helping to pay for it all.  That means that the increments in demand for public goods are paid in large part by the rest of Iowa, nearly all of whom are not benefitting directly or indirectly from the development.

It must be obvious to all but the most willfully ignorant that these large tax credit deals of late – Orascom, Kum & Go, Facebook, Microsoft, Google – will not pay back Iowa taxpayers’ generosity. Ever.  There is no magical fiscal multiplier effect to offset these indefensible public funds giveaways.  Over time they serve solely to enhance the bottom lines of prominent, already successful, and immensely profitable firms, while the rest of Iowa bears the burden of paying incrementally higher shares of the taxes or fees for state and local government services that benefit us all, including the subsidized firms and their employees. 

It is a completely unsustainable system, and it represents a classic “race to the bottom” where tax costs are shifted away from the benefitted businesses onto households and other existing businesses.  Over time, public services inevitably become too expensive and difficult to maintain so cuts are made, economies begin to suffer because lower quality public goods undermine a healthy economy, and in response politicians inevitably double-down on tax based incentives worsening the downward spiral.

Furthermore, the official calculus of economic development success is now measured not in jobs, but in the total amount of capital investment.  Not only is this unsustainable, it borders on malfeasance. 

Here’s why: We supposedly have a market economy that allocates private investment.  Governments’ traditional roles in supporting the economy centered on providing necessary and desired public goods – schools, safe communities, essential infrastructure, etc. – and were only historically enabled to actively engage in economic development when there were clear and unarguable market failures.  Slums and blight are market failures, for example, that demand public intervention. So may be localized high unemployment.

But the siting of a new headquarters a veritable stone’s throw away from an old headquarters is not addressing a market failure.  Nor is the siting of data centers, fertilizer plants, or any number of other normal business investments in Iowa.  Iowa’s state and local governments have been enabled to engage in the practice of economic development with, anymore, precious few restrictions or prerequisites.

Economic development as practiced in Iowa by state and many, not all, local government officials is thoroughly out of control.  Each additional increment creates a precedent that cannot be rolled back easily.  The next firm that comes knocking already knows what the previous “standing offer” was and often presses for even more subsidy.  In a step-by-step fashion, our economic development leaders have ratcheted up the bidding such that they are now as a matter of course paying unconscionable public costs in the name of paltry private sector job growth and a deterioration in our collective fiscal welfare.  Our welfare declines because the taxpayer will never be repaid, so everyone else is worse off marginally as a result of these deals.

Public officials have a special duty with public money, and that includes the use of tax credits.  It is a high duty. Our governments are to promote the common good and to obtain as efficiently as possible sets of commonly-agreed social objectives.  In economic development the primary social objective is employment, especially in areas or during periods of high unemployment.  The public good in this is that higher levels of employment lead to more stable households and lower social costs.  Our governments therefore have a primary obligation to maximize social gains, i.e., employment, if they can, and to simultaneously minimize society’s costs in doing so.

But the public good of this means increasing the wellbeing of the existing labor force; higher employment means reducing the unemployed.  More employment, as in enticing new people to an already booming economy, is not a category of public good, and neither is underwriting private capital investment that would have happened nonetheless.

Our state and local economic development practices are now topsy-turvy.  State and local officials trumpet capital investment gains as the standard of success, instead of job gains.  The IDED Kum & Go award announcement made no mention of jobs.  One had to look to the Des Moines Register for that bit of information.  And the canard of competency is made most complete as development officials and politicians convince themselves, and would have us believe, that these very minor gains in state employment, no matter how expensively acquired, would not have happened “but-for” their negotiation skills and the bundle of incentives they allotted.

Easy to say, but nearly impossible to prove.

I always argue that Iowa’s best economic development attributes are its good schools, high quality infrastructure, smart and hard-working citizens, and its honest and transparent governments.  But I am frequently accused of naïveté. Modern economic development, they tell me, requires the kind of grand-slam, swing-for-the-fences wheeling and dealing now practiced by both the state of Iowa and its many local governments. And one better be in this business big or get out altogether.   

As I have said countless times before, it is so easy to be big with other peoples’ money.

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  • speaking of specious claims

    about jobs in Iowa, nice letter to the editor in the Des Moines Register last week:

    Kathie Obradovich’s article Aug. 25 [“Outsiders spend millions vs. Iowa”] noting that outside groups were promoting anti-Iowa interests stated that “Iowa’s ethanol industry … is responsible for 47,000 jobs.”

    The U.S. Bureau of Labor Statistics tells us that Iowa averaged 1,845 ethanol manufacturing jobs for 2014.

    Using standard economic methods, our research indicates there are likely 6,650 to 7,000 jobs in Iowa directly or indirectly dependent on ethanol production.

    The multiplier required to get the job number to 47,000 is derived not from economics, but from trade group alchemy.

    – Dave Swenson, Associate Scientist, Department of Economics, Iowa State University