Written by Nathan W. Tucker
On Wednesday, Iowa Senate Democrats unanimously voted to cut tax credits for a number of economic development activities by $65 million. The bill, Senate File 2380, would cut the amount of money awarded to businesses, entrepreneurs, and farmers from $185 million to $120 million.
Tax credits allow businesses to reduce their taxes by reinvesting in Iowa. They are often used to encourage specific economic activity, such as leasing land and equipment to new farmers or historic preservation projects. The businesses only receive the tax credit after they have made the investment.
Like all tax reductions, the theory behind tax credits is simple—the government will let you keep more of your money to let you invest it in far better ways than they can so that the government can increase its tax revenue off of your increased profits. But unlike a straightforward tax cut, tax credits have the added benefit of ensuring that the money is redeveloped in the state and in targeted industries.
How well it works can be seen in the numbers. According to David Roderer of the Iowa Chamber Alliance, an investment by the state of $667 million over a period of six and a half years produced a return of $12 billion in economic development. “The proof is in the numbers,” he said. “The bigger question is: Why aren’t we doing more of this?”
The answer? Democrats tried to justify their bill by calling it “tax reform” in the wake of the film tax credit scandal, a program which has now been suspended for two years. Senator Matt McCoy (D-Des Moines) claimed that the bill would “ensure that the programs we have working out there are actually good programs and that they’re appropriate and that they’re administered properly.”
But the bill doesn’t reform anything. According to Peter Fisher, research director of the Iowa Policy Project, the bill doesn’t incorporate most, if any, of the recommendations of the Iowa tax credit review panel. The panel, created in the wake of the film credit scandal, recommended such things as a five-year sunset on all tax credits and the elimination of the transferability or refundability of tax credits, none of which were included in the legislation.
Still other senators tried to excuse their actions as a way to save money. Senator Joe Bolkcom (Democrat-Iowa City) said that the state can’t afford to offer a half billion dollars in tax credits in the current economic climate. The nonpartisan Legislative Services Agency, however, has actually projected minimal direct savings by the state, and most of those are tied to the film credit suspension.
Rather than asking how can we afford the tax credits, Senator Bolkcom and the rest of the Democrats should be asking, “What state cannot afford to offer half a billion dollars in tax credits?” Instead of eliminating the credits, they should be looking at additional ways that the state can spur economic development—economic development which in turn will fill the state’s coffers with additional tax revenue.
At a time when our neighboring states continue to offer tax incentives for businesses to relocate and expand in their borders, the Iowa Senate has opted to be the party of “No.” In order to try to save a few pennies now, they have sent non-Iowan businesses the message to stay away and told Iowa businesses that they have to do more with less.
The Democrats have failed to realize that those few pennies would yield a large investment in a matter of a few years, and that by adding, in essence, a tax to Iowa businesses, they are slowing the engine of economic recovery in this state.
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