November 24, 2009

Letter to Governor Culver of Iowa Regarding the Iowa Tax Credit Review Panel

Chester J. Culver
Governor of Iowa
State Capitol
1007 East Grand Avenue
Des Moines, IA 50319

Dear Governor Culver:

We at the Tax Foundation were pleased to learn of your decision to create a tax credit review panel to evaluate the cost-benefit of tax credits offered in Iowa. The criteria you have outlined will be informative in helping Iowa taxpayers consider the true benefits and costs of this often murky area of state taxation.

A $10 million income tax credit for a special interest often receives less scrutiny than an otherwise identical $10 million appropriation. Boosters of tax credits, particularly wasteful and ineffective film tax credits, thrive on this lack of oversight. Requiring that each tax credit have a stated purpose and that each be evaluated annually for whether they are achieving that purpose is a valuable step for Iowa government.

Lawmakers in all states, trying to be mindful of their states’ business tax climates, are often tempted to lure businesses with lucrative tax incentives and subsidies instead of pursuing broad-based tax reform. As they do so, redundant tax credits are often created and remain even after they serve no positive purpose. Further, while officials roll out the red carpet for new businesses, existing in-state employers are taken for granted and are stuck paying higher taxes.

A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state’s competitiveness, by repealing all incentives and subsidies. The tax code would thus be used just for raising revenue, not for changing economic behavior. While a review of state tax credits won’t achieve these goals right away, it is a positive first step toward informing tax code choices. We thank you and your officials for your action and are ready to assist however we can with our data, analysis, research and state comparisons on state tax credits.

Yours Very Truly,

Joseph Henchman
Director of State Projects

CC: Members of the Tax Credit Review Panel