MoreLIP: The Tax Incentive Conundrum

The Des Moines Register posted a story last week that, much to the dismay of its beneficiaries, the Iowa state government must make public tax refunds of $500,000 or more provided to companies that have invested qualifying amounts in R&D.

It’s but a tiny step toward transparency in the panoply of tax incentive and tax refund programs that states have cobbled together for over a century -- often to raid their neighbors in the name of economic development. These days there is such a mish-mash of tax incentive/refund programs that there seems no functional way to resolve the use/abuse challenge of taxpayer funds. The problem keeps growing -- regardless of the economy -- largely because no governmental agency can afford to say no.

In good times, the states (and sometimes even the cities) have funds sufficient to readily tap the till to compete for projects. In hard times, states become desperate -- they'll do anything to create jobs. So the system of tax credits and incentives continues uninterrupted, until no business executive in his/her right mind would seriously consider expansion without determining what he can weasel from government tax credits for undertaking the project.

In many cases, really big projects are shopped around to see which state will put up the biggest prize. Some of the numbers get up into the multi-millions of dollars. In fact, there exists a large industry that simply assists cities and states with business recruitment (formerly called ‘smokestack chasing’ -- a holdover term from our diminishing manufacturing base).

It’s explicable, of course. Economic developers make a lot of money and want to retain their jobs. Policy makers welcome the opportunity to show what they're doing to aid their constituents. The combination of competition between the states to obtain the jobs and the need for secrecy to win that competition results in large amounts of taxpayer dollars being spent without the taxpayers' knowledge until after the fact.

There is little transparency to such incentive abuse. Such spending is often hidden behind claims such as ‘trade secrets’ or privacy. Further, because tax incentives and tax refunds take on such a wide variety of structures, there appears to be no practical way to harness the problem.

Perhaps this small step by Iowa can become an inspiration to others by which citizens are made aware of such spending before the fact. Making public such plans to use taxpayer funds might also help competing government agencies from being used as pawns, as marketers of the incentives extract a better deal from the city or state next door by playing one against the other.

But don’t count on it. Right now, only the taxpayer is at risk in this game. All other players claim success.