Sunday, April 27, 2008

Growing Iowa's Economy the Right Way

April 27, 2008, 6:15 p.m.

Growing Iowa's Economy Without Corporate Welfare:
Bob Patton & David Miles


Iowa City's pride, Bob Patton, has put pen to paper to portray, as no mere words can do, Sheraton's request for Iowa City taxpayers' money.




Bob Patton, "Share and Sheraton Alike,"
Iowa City Press-Citizen, April 26, 2008, p. A12; posted April 25, 2008, 3:14 p.m. (Elephant with "Sheraton" on its rear is carrying a sign reading, "This white elephant is now under new ownership." A street cleaner with "RBD LLC" (the new owner) on his sleeve and "TIF Request" on his wheeled container -- presumably cleaning up after the elephant -- is handing a street broom to an unnamed woman labeled "City of Iowa City.")

For explanatory background facts and opinion on this story see (with their links to more), Nicholas Johnson, "Call the Cops, Robbery in Progress," April 24, 2008, Nicholas Johnson, "Bush and Giveaways to Sheraton," April 25, 2008, and Nicholas Johnson, "Golden Rules & Revolutions: A Series - VIII," April 19, 2008 (with links to prior 7).

I guess the City Council is concerned that if it didn't bribe RBD LLC with enough taxpayers' cash RBD might just move the Sheraton to Chicago or somewhere.

And what's this "new parking agreement" deal? All we get from the Press-Citizen's report is that the demands "included asking for a new parking agreement in the Dubuque Street Parking Ramp, taking out the public access point through the center of the hotel and tax incentives to make repairs." Kathryn Fiegen, "Sheraton's case presented to city; Economic committee asks for more information on TIF," Iowa City Press-Citizen, April 23, 2008. It's RBD's and the City's responsibility, not the Press-Citizen's, but what are the details? Will Iowa City's taxpayers be paying not only the Sheraton's property taxes, but the parking fees for its employees and guests as well? Aren't citizens entitled to know that?

As for the "public access point through the center of the hotel," that was embodied in the physical structure of the building as well as the contractual agreements surrounding the removal of Dubuque Street (one presumes). One of the best proposals I've seen -- on the assumption that anything needs be done -- is in a comment on the Press-Citizen's editorial,

I think the best option with the Sheraton walkway would be to tear out the doors on either side [of the walkway, north and south] and make it an outside covered breezeway. Drunks would have little incentive to congregate there and it would still provide access between the hotel and the restaurant/bar and the public wouldn't feel put-off when passing through.
Editorial, "Don't close Sheraton walkway, but do discuss possible tax incentives," Iowa City Press-Citizen, April 25, 2008, p. A11, Reader Comment Posted by: HerbBhang on Fri Apr 25, 2008 7:25 pm.

Nor is this the only giveaway in Iowa City these days. Although the Sheraton robbery has overshadowed the story, the City is also in the process of selling off public land near the local airport -- with no obvious benefits to local residents. Kathryn Fiegen, "City in Talks to Sell Land Near the Airport; Nearby Business Worried About Looks," Iowa City Press-Citizen, April 18, 2008, p. A1 ("Jay Honeck, who owns the nearby Alexis Park Inn & Suites, told the council Monday he thought the rezoning to make the land suitable for heavy commercial use would be a "catastrophe." He said the proposed facility could make the area even more unattractive with exposed storage areas and heavy equipment everywhere. . . . Honeck told the council he didn't think the city was monitoring the condition of its south entrance. "I want them to be held to the same high standards we are when it comes to handling their property," he said. "Just look at the city-owned land next to us -- are they following their own rules?").

In my op ed column,
Nicholas Johnson, "Courage, Councilors," Iowa City Press-Citizen, October 3, 2007, p. A12, I itemized a number of categories of reasons why corporate subsidy, including TIFs and other forms of tax breaks, simply don't make practical sense -- regardless of what you think of the hypocrisy of the get-the-government-off-my-back crowd's asking for them. One of the 11 categories was,

Alternative approaches do work. Businesses look for more than taxpayers’ bribes; things like an educated and skilled workforce, transportation and communication infrastructure, and quality of life – schools, parks, theaters, neighborhoods, restaurants and natural settings. Those investments will both attract business and benefit the public.
So I was especially pleased to hear Iowa's pride in its new Board of Regents' President, David Miles, express a comparable view yesterday in Iowa City:

"We need to make the case that there is a very real public good for Iowa, the nation and the world to have an educated citizenry," [Iowa Board of Regents President David] Miles said. The way to attract businesses to the state is not through tax credits, but through having educated workers, he said.
Erin Jordan, "Regent says universities must be accessible," Des Moines Register, April 27, 2008, p. B2.

And note that Miles is not some "ivory tower Liberal." (I don't know whether he drinks lattes.) He's a business person -- in addition to his Board of Regents responsibilities he is the managing director of the Miles Group (investment business) and the former CEO of Countryside Renewable Energy (consolidating ethanol plants). So he knows what he's talking about when he says "the way to attract businesses to the state is not through tax credits."

I'd be inclined to give a lot more weight to his opinions on the subject than those of an Iowa legislator or city council member.

But wait, there's more.

We can't gamble our way to riches. I've often expressed here my skepticism regarding the wisdom of Iowa's legalization and promotion of gambling as a component of economic development. Recently there was a little confirmation in the report on 2007 gambling revenues: "Overall, revenue increases at the state's 17 racetracks and casinos fell 1 percent to 3 percent last year. . . . Some [casino managers] . . . said they planned to build more hotels and restaurants, or improve entertainment." Associated Press, "Gaming Revenues in Iowa Grow Little in 2007," The Gazette, April 19, 2008, p. B7.

"Build it and they will come" really works -- in the movies. There were many missing links in the chain of reasoning regarding the proposed indoor rain forest project. See Nicholas Johnson, Earthpark (2001-2007). Among them was the myopic focus on the costs of construction (for which not one dime was raised) to the exclusion of the challenge of creating and maintaining a cash flow adequate to keep it going. It's a common oversight when a community permits local booster enthusiasm to blind citizens' ability to see the need for basic business plans.

Now that perspective has been picked up by another author in another context -- the proposed Coralville venue:

Many communities build a performing arts center and then grow frustrated when it can't pay for itself. These centers can improve the quality of life, they can attract new businesses, they can provide both art and entertainment, but they can't turn a profit. . . . Like the race for new stadiums, communities often fail to factor the long-term costs required to make these projects successful. . . . If the people of Johnson Country want Coralville's proposed center to succeed, they will need to support it -- not just through its build, but also in every year of its operation.
David McGraw, "If You Build It, the Audiences Will Come, but the Audiences Alone Won't Pay for It," Iowa City Press-Citizen, April 19, 2008, p. A15 (McGraw teaches art management at the University of Iowa).

And taxpayers continue to fund for-profit businesses.

HUSCO International was awarded incentives to renovate, expand and equip an existing building in Maquoketa in an action by the Iowa Department of Economic Development board in Des Moines. . . .

The incentives included $800,000 from the Economic Development Set-Aside program and Enterprise Zone benefits.

The IDED board separately approved incentives for plants to produce wind turbine components, decorative metal containers, structural steel assemblies, ethanol and seed corn. They include:

-- Tax benefits and direct incentives to Trinity Structural Towers to convert a 300,000square-foot manufacturing building in Newton for assembly of wind turbine towers. Trinity is expected to qualify for $649,100 in state tax credits for the project under the High Quality Jobs Creation program, in addition to a $630,000 forgivable loan from the Physical Infrastructure Assistance Program. . . .

-- Tax benefits and direct incentives to Independent Can Co. for building and equipping a $5 million plant in Fort Madison to expand production of decorative metal containers. The IDED board approved $100,000 from the Community Economic Betterment Account program, tax benefits to expand in an Enterprise Zone, and the Targeted Jobs Withholding Tax Credit. . . .

-- Tax benefits and direct incentives to Pioneer Hi-Bred, a DuPont subsidiary, for multiple projects. They include a $4 million investment in a warehouse expansion and a new dryer at the Durant seed plant. The project is expected to create one job . . ..

-- Tax benefits and direct incentives to Golden Grain Energy in Mason City for a facility to produce biodiesel from corn oil byproducts of ethanol production. . . .
David DeWitte, "Maquoketa Attracts Hydraulic Controls Plant," The Gazette, April 18, 2008, p. B7.

Does this kind of corporate welfare pay? The answer is, at best, not clear:

One of the incentives used by Iowa . . . is the Research Activities Credit. . . . designed to offset some . . . research and development [expenses] . . ..

Even if the research tax credit amounts to more than a company’s state income tax liability, the state pays back — “refunds” — the difference. And the tax credit may be doubled (supplemental credit) if the business meets standards for high-quality job creation.

That seems like a generous incentive. . . .

Trouble is, we don’t know the true impact.

The Iowa Department of Revenue can tell you the total research tax credits awarded. From 2000 through 2005, there was an average of $29.7 million in annual claims. Most of it, $27.2 million per year, was paid out in “refunds.” However, by law, the specific amount each company receives is confidential . . .. Also, there appears to be no requirement to document whether the research tax credit actually works — as any public subsidy policy should.

The Department of Revenue . . . recently attempted to study the impact of the research tax credit in Iowa.

The analysis found no conclusive evidence that it increased research expenditures, research-related employment or patent activity.

[T]he Iowa Fiscal Partnership . . . noted this week that 85 percent of the tax credits went to just 10 companies in 2005. . . . Rockwell Collins of Cedar Rapids could be receiving an annual research tax credit of $8 million, the most of any company in the state, while its income tax liability may be less than that amount. . . .

[T]he program’s lack of transparency is troubling. So is the dearth of information verifying whether this subsidy is justified at present levels. The Legislature should review and consider changes that are more accountable to taxpayers.
Editorial, "Tax Credit: Too Generous or Justified?" The Gazette, April 18, 2008, p. A4. For additional details see the prior day's story, David DeWitte, "Report Raps Undisclosed Research Tax Credits," The Gazette, April 17, 2008, p. B8.

To which I say, "Amen, brother!"

Nor, of course, is this disparity in government's response to the needs of the poor and of the wealthy limited to cities and states -- as we've recently seen with the disparate response by the Congress and Federal Reserve to the plight of the Wall Street financial community on the one hand and that of homeowners being foreclosed against on the other . . .



This editorial cartoon; Credit: Copyright by David Horsey and the Seattle Post-Intelligencer, March 27, 2008 (used here as non-commercial "fair use" for purposes of commentary).

If you are unable to read the text, there are two panels, "The Prodigal Son" and "The Not-So-Prodigal Son." The Prodigal Son is saying, "Father! I got filthy rich in risky loans and then the real estate market tanked." The father replies, "My son has returned! I'll kill the fatted calf and bail you out!"
"The Not-So-Prodigal Son" is saying, "Father! I defaulted on one of those risky loans and lost my house!" To which the father replies, "Life's unfair, Kid. Deal with it."

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2 comments:

John Barleykorn said...

All the quality of life issues do matter in attracting economic development. Richard Florida has written widely about this in his discussions about the "creative class". Certainly, there are many other things that do matter besides incentives: Good Infrastructure, Good Schools, Trails and other rec activities, etc. Those do matter to a point. But there is always someone willing to sweeten the pot in the competition for jobs, tax base, etc. So, if Iowa City or the State of Iowa were to drop TIF, many states won't. Many countries will also offer incentives of one kind or another.

Lamenting the use of these things is rather pointless. They are here to stay.

Nick said...

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