There is a lot of discussion today about some of the tools states, counties and cities use for economic development. Some of the things I hear are inaccurate.
As someone who served on the board of the Tax Research Council from the 1970s through the early 1990s, who served for 10 years on the board of the Iowa Department of Economic Development in the 1990s and who today serves on the board of The Siouxland Initiative (the Siouxland Chamber of Commerce's economic development arm), I'm going to do my best to explain some of the tools as factually as possible.
States, cities and counties all can and do use tax incentives to keep and attract businesses that are expanding or are startups. You might ask: Do companies play states against one another? Absolutely, they are trying to get the most they can. Is it worth it to the states and or communities to give such incentives? Yes, it is for the greatest majority of projects because permanent jobs are created as well as construction work, which means products are purchased, property values go up and, in turn, sales tax and income tax are generated.
Legislation has given cities and counties the opportunity to use tax increment financing (TIF). Most generally, it has a sunset after 10 years. It is used as a subsidy for redevelopment, infrastructure and other community improvement projects. It is a powerful tool that allows municipalities to self-finance redevelopment programs using the increased property tax revenue the improvements generate. As the area redevelops, property values rise and so does tax collection. The city splits the property tax into two streams. The first stream is set at the original amount of property tax value before redevelopment, known as the "base rate." That money goes to school districts or the city's general fund to pay for local services such as police and fire. The second stream is for paying for the redevelopment.
Cities and towns assume that TIF will spur new development, increase property values, create new jobs and create new tax revenues which will be used to pay for the project. As I stated earlier, TIF districts typically sunset in about 10 years.
States like to use tax credits, which are not a direct outlay of cash. If a state ties something tangible to the credits, such as job creation or retained jobs, states have a way of measuring how beneficial the incentive is. Tax incentives are popular economic tools; there is not a state that does not use some tax credit, including those states that do not have income taxes. No state wants to be the only one that does not play.
The takeaway for a state to be successful when using tax credits is that a way exists to track and verify that a company is doing what it said it would.
In order to receive business incentives, the state of Iowa requires: Jobs must pay a starting wage of 100 percent of the laborshed wage and will reach 120 percent within three years (by the end of the contract performance period). This is according to the Iowa Economic Development Authority (IEDA).
When I was on the board of the Iowa Department of Economic Development in the 1990s, we did not use tax credits, most generally. We had other programs in place that were a combination of loans and grants. The loans had an interest rate of 0 to 3 percent.
If a company can't meet a contract it signs with the state, there is little chance of recovering money given to them. That is the downside of giving cash as opposed to tax credits in which no cash is involved.
In my opinion, tax credits are a great tool for states to have in their quiver for economic development for the simple reason the state is not laying out cash, they can set goals that have to be met, and if the company does not meet such items as the scope of work and wage scale, then they are liable and penalties can be enforced.
Next week: Al Sturgeon
Charese Yanney of Sioux City is owner and managing partner of Guarantee Roofing, Siding and Insulation Co. She serves on the Iowa Department of Transportation Commission, the Iowa Economic Development Authority Vision Iowa board, the Missouri River Historical Development board and the Siouxland Initiative Executive Committee.