Incentives have been teed up and demagogued as corporate welfare since forever. In the real world, they're not optional.
Incentives play a fundamental role in securing job creation and retention projects for communities in every corner of this country, and in most countries, within our global economy. Economic developers – the men and women who work to attract new capital and jobs to their communities every day in our state – subscribe to the sentiment that public financial inducements are designed to get a good deal done. Incentives play a critical role in ensuring that billions of dollars of future tax base and thousands of jobs matriculate in our state rather than another but economic developers like me have generally done a poor job of communicating this. As a result, incentives have been teed up, demagogued and reduced to an overly simplified narrative: incentives are all cash out of the taxpayer’s pocket.
NOTE: This piece first appeared in the Iowa View section of the Des Moines Register on August 10, 2016.
Not true. The vast majority of incentives awarded in Iowa are credits against future revenue, or tax credits.
Most tax credits are instruments to provide a reduction in tax liability for future investments by a company – tax revenue we currently are not receiving. The total value of a tax credits-based incentives package [which can include credits against tax, local property tax and other tax streams] are not a check written by the government to the company. Only after the new tax receipts are received by the relevant taxing bodies does the company receive a credit back.
One exception to this is Iowa’s Research Activities Tax Credit program, which offers ‘refundability’, or the ability of the company be assured it will receive the full value of its tax credit award. This program is used to help attract the most sought-after economic development investment of all – research and development activities, which are exceptionally capital-intensive and support extremely high-value jobs in the communities in which the R&D takes place. There is general agreement that R&D tax credits promote R&D around the world, a point made clear in December last year when Congress passed the omnibus spending PATH Act, which included a provision to make permanent the federal R&D tax credit.
In a new compendium, Rethinking Investment Incentives: Trends and Policy Options, a chapter written by Christian Bellak and Markus Leibrecht titled “Use of Investment Incentives: The Cases of R&D Related Incentives and International Investment Agreements” highlights the economic case for investment incentives, specifically with respect to R&D incentives. The authors posit that every member of The Organization for Economic Cooperation and Development, an organization of 34 democracies with market economies who work together to promote prosperity, offer direct incentives for R&D, and present important justification for public R&D investment incentives.
Attracting innovation investment for any state attempting to compete in the 21st century knowledge economy is important. When exploring the veracity of programs like the R&D program, we have to ask ourselves whether a high-value job is less worthy of incentivizing because it is created by a large corporation. Are the social, cultural and fiscal contributions of the individual holding a job created by a company utilizing the R&D program less profound or less important?
The R&D tax credit program is a reflection of the marketplace our state and its communities find themselves competing in for new jobs and capital investment. It is up to all of us to determine how best to compete in a jobs/projects marketplace which includes incentives as a fundamental component. We must choose whether to compete or remain on the sidelines.