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States should beware ALEC-brand snake oil

Posted November 29th, 2012 to Blog

Peter Fisher

Legislative sessions will be starting across the country after the first of the year, and with them, some very bad ideas for public policy.

The purveyor of many poor prescriptions is a very influential right-wing organization, the American Legislative Exchange Council, known as ALEC. The organization promotes policies to cut taxes and regulations in the disguise of promoting economic growth, but what they really do is reduce services, opportunity and accountability.

In short, the ALEC medicine show is a prescription for poor results, and states should beware.

Our new report, “Selling Snake Oil to the States,” examines ALEC’s proposals and the misinformed, primitive methodology behind the study that supports them. The new report, a joint project of the Iowa Policy Project in Iowa City and Good Jobs First in Washington, D.C., illustrates how ALEC’s prescriptions really offer stagnation and wage suppression.

In fact, we find that since ALEC first published its annual “Rich States, Poor States” study with its Economic Outlook Ranking in 2007, states that were rated better have actually done worse economically.

Find “Selling Snake Oil to the States” at

We tested ALEC’s claims against actual economic results. We conclude that eliminating progressive taxes, suppressing wages, and cutting public services are actually a recipe for economic inequality, declining incomes, and undermining public infrastructure and education that really matter for long-term economic growth.

ALEC’s rankings are based on arguments and evidence that range from deeply flawed to nonexistent, consistently ignoring decades of peer-reviewed academic research.

What we know from research is that the composition of a state’s economy — whether it has disproportionate shares of high-growth or low-growth industries — is a far better predictor of a state’s relative success over the past five years. Public policy makers need to stick to the basics and recognize that public services that benefit all employers.

Posted by Peter Fisher, Research Director

IFP News: Selling Snake Oil to the States

IPP-Good Jobs First Study:

ALEC’s Advice to States on Jobs Is Actually a Recipe for Stagnation and Wage Suppression

View report (PDF) from Iowa Policy Project/Iowa Fiscal Partnership and Good Jobs First
Download this news release (2-page PDF)

snakeoiltothestates-3inWashington, D.C. (Nov. 28, 2012) — A new study finds that state tax and regulatory policies recommended by the American Legislative Exchange Council (ALEC) fail to promote stronger job creation or income growth, and actually predict a worse performance.

Since ALEC first published its annual Rich States, Poor States study with its Economic Outlook Ranking in 2007, states that were rated better have actually done worse economically.

Those are the key findings of “Selling Snake Oil to the States,” a study published today by Good Jobs First and the Iowa Policy Project and freely available online at It was released at a press conference the same week ALEC holds its annual fall meeting in Washington, D.C.

“We tested ALEC’s claims against actual economic results,” said Dr. Peter Fisher, research director of the Iowa Policy Project and primary author of the study. “We conclude that eliminating progressive taxes, suppressing wages, and cutting public services are actually a recipe for economic inequality, declining incomes, and undermining public infrastructure and education that really matter for long-term economic growth.”

The study dissects the methodology used by ALEC’s lead author Arthur Laffer and his co-authors. It finds that their arguments and evidence range from deeply flawed to nonexistent, consistently ignoring decades of peer-reviewed academic research. Instead, Laffer et al repeatedly engage in methodologically primitive approaches such as two-factor correlations and comparing arbitrary small numbers of states instead of all 50.

The study finds that the composition of a state’s economy — whether it has disproportionate shares of high-growth or low-growth industries — was a far better predictor of a state’s relative success over the past five years.

“State corporate income taxes average less than one-fifth of 1 percent of the average company’s costs,” said Fisher. “The ALEC/Laffer studies would have state leaders ignore site-location basics and disinvest public goods that benefit all employers.”

Good Jobs First is a nonprofit, nonpartisan resource promoting accountability in economic development and smart growth for working families. It was founded in 1998 and is based in Washington, D.C.

The Iowa Policy Project is a nonpartisan, nonprofit organization promoting public policy that fosters economic opportunity while safeguarding the health and well-being of Iowa’s people and environment. It was formed in 2001 and is based in Iowa City.

How about that timing of worker pay report?

Posted October 31st, 2012 to Blog
Mike Owen

Mike Owen

Timing is everything.

Consider the announcement Tuesday by the Branstad administration of a new report produced by an outside company to examine whether Iowa state workers are paid too much.

Paid too much?

As the Department of Administrative Services was releasing the report, emergency rescue workers across the Eastern seaboard were putting themselves in harm’s way to help their neighbors in the path of the deadly Hurricane Sandy. And right here in Iowa, within a couple hours of the DAS news conference, bank robbers shot two law enforcement officers — critically wounding the Sumner police chief and injuring a state trooper.

We count on public servants every day, sometimes when lives are at stake, sometimes in enriching life with education, sometimes in just keeping life orderly enough that we can enjoy it without worrying whether the water or food will poison us, or that our job will not put us in danger we did not sign up for.

Oh, and the report? It found that pay scales for Iowa state workers are generally competitive. Where the report cited potential problems, the information provided was too sketchy to delve in and really go through it. And, being produced by a private company that copyrighted the report, we might just never know what our tax dollars produced. This is what happens with privatization, folks. But if you want a quick look at the holes in the report, see the review Tuesday by IPP’s Peter Fisher.

So, for those less inclined toward knee-jerk appeals against public workers, the timing of this report, you might say, wasn’t too bad.

Posted by Mike Owen, Assistant Director


Did Iowa just get taken to the cleaners?

Posted September 21st, 2012 to Blog
Peter Fisher

Peter Fisher

The enormous package of state and local incentives provided to the Egyptian company Orascom to locate a fertilizer plant in Lee County has drawn considerable attention. The package includes $110 million in state tax credits and other incentives and $133 million in local tax abatements — a total of $243 million when all is said and done. All this to attract a plant that will employ just 165 workers.

At a cost per worker of nearly $1.5 million, the incentive is an astounding amount, well beyond the normal range of awards, in Iowa or anywhere else. (While the company claims a large number of ancillary jobs will follow, these claims are unverifiable, and it is not clear how many would even fall to Iowa residents; furthermore, there are always some spin-off jobs with any project, so the valid comparison with other awards is in terms of cost per direct job.)

Yet little attention has been paid to what is possibly the largest incentive provided: tax-exempt bonds, not even included in the above calculations.

Early on in the negotiations, in fact last April, the Iowa Finance Authority awarded Orascom up to $1.19 billion in Midwest Disaster Area (MDA) bonds. These bonds are exempt from federal income tax; Midwestern states affected by the 2008 flood were each given an allocation of these bonds to be awarded to projects in eligible counties — those declared disaster areas after the flood. The $1.19 billion loan would constitute 46 percent of the Iowa allocation.

Because the interest is exempt from federal income tax, the wealthy individuals and financial institutions that would purchase such bonds will accept a lower interest rate than they would require on taxable corporate bonds. The after-tax rate is what they focus on. This means that the company saves money. How much? That depends on the spread between corporate bond interest rates and tax-exempt rates.

Information from officials at the Iowa Finance Authority indicates that the spread would likely range from 1 percent to 2 percent. For a $1.19 billion bond issue to be repaid in equal annual installments over a 20-year period, the savings in interest would amount to between $153 million and $297 million, depending on what the interest rate differential turned out to be.

These tax-exempt bonds could have been used in Lee County or in Scott County; both were flood disaster areas and both, at one point, were under consideration as a location for the fertilizer plant. When the Scott County site was rejected, attention turned to Illinois, specifically the area near Peoria. But neither Peoria County nor any counties surrounding it were eligible for the Illinois allocation of MDA bonds.

This means that Lee County was starting with a huge advantage over the Illinois site: the availability of an incentive probably worth in the neighborhood of $200 million.

While the MDA bonds cost federal taxpayers, there is no loss of Iowa income-tax revenue. (The federal cost comes because the federal government forgoes income-tax revenue on the interest, which must then be made up by the rest of federal taxpayers.) But the point is that, whoever bears the cost, this was a very large incentive that Iowa could provide and Illinois could not.

Thus it raises the question: Given this advantage from the start, why was it necessary for the state of Iowa and Lee County to double down and provide another $200 plus million, especially when the Illinois tax incentives were not even a reality — they had passed the Illinois Senate, but not the House, and the Legislature had adjourned months ago?

Did Iowa just get taken to the cleaners?

Posted by Peter Fisher, Research Director

Does Iowa know when to walk away?

Posted September 5th, 2012 to Blog
Peter Fisher

Peter Fisher

There’s Texas Hold ’Em,” and then there’s “Iowa Fold ’Em.”

Wouldn’t you just love to play poker against the folks who run this state?

They never call a bluff. Companies come calling with demands for tax breaks and big checks, or they’ll build somewhere else. And Iowa just happily falls in line with the demands. You can almost hear Kenny Rogers singing in the background: “Know when to walk away, and know when to run.”

The latest: Today the board of the Iowa Economic Development Authority (IEDA) is scheduled to consider sweetening its already generous offer to Orascom — $35 million to build a $1.3 billion fertilizer plant in Lee County — to about $110 million with a slew of new tax credits. As The Des Moines Register points out today, that’s $110 million for 165 “permanent” jobs paying on average $48,000 a year, plus construction jobs that will be gone when the project is finished.

The state tax credits are in addition to the enormous benefit the state is providing by allocating federal tax-exempt flood recovery bonds to this project. If the interest rate difference — between taxable and tax-exempt bonds — were 1 percentage point, the company would save $320 million in interest payments over the life of the $1.2 billion bond. That would bring the firm’s total benefits to $2.7 million per permanent job, a truly astounding number. Even without considering the federal interest subsidy, the state tax credits would total $687,500 per job, many times the typical level of subsidy in deals such as this.

There are no estimates available about the potential environmental costs that will be caused by this plant. Since Iowa does a poor job of monitoring for pollution damage, those ongoing costs might be low, but if there is an accident, it could be costly.

The Register also quotes Debi Durham, head of IEDA, that incentives wouldn’t be needed if Iowa were to reduce corporate income tax rates. Nonsense. Research has shown repeatedly that this is a myth, and that in fact, Iowa’s income taxes paid by corporations are competitive with other states. In many cases, giant corporations are paying not a dime in income tax yet getting huge subsidy checks from the state to do things they would do without incentives.

This hand is the one we are dealt from years of unaccountable economic development strategies by Iowa state government.

Time for a fresh deck.

Posted by Peter Fisher, Research Director

Corporate Taxes and State Economic Growth

10-page PDF
Revised April 2013

By Peter S. Fisher

When a business contemplates a major facility expansion or relocation, they naturally ask themselves: Where is the best place for this facility to be? When evaluating alternative locations, a firm will consider a wide range of factors that affect its costs, productivity or sales: access to markets and to suppliers; transportation costs; energy costs; access to a pool of labor with appropriate education and skills; wage rates; health care costs; the quality of schools, recreation opportunities, climate and other amenities important in attracting skilled labor; the quality of state and local government services, such as public safety and infrastructure; and state and local taxes.

Proponents of business tax breaks claim that taxes are a significant factor in the location choices of businesses, and that a state can tax-cut its way to economic growth and generate tax revenue in the process. As we will see, there are good reasons to be skeptical of such a claim on the face of it, and several decades of research on the relation between state taxes and growth confirm that such claims are vastly overblown and misleading. Business tax breaks turn out to be an expensive and inefficient way to attempt to stimulate a state economy.

State Corporate Taxes are a Small Part of the Cost of Doing Business

State corporate tax breaks are alleged to have substantial influence on a corporation’s decision about where to expand or to locate a new plant. There is good reason to be skeptical of such claims at the outset, for a simple reason: Differences in state corporate income taxes from one state to another are usually trivial when stacked up against differences in other costs of doing business. Businesses take many factors into account when making an investment location decision: access to markets and to suppliers; transportation costs; access to a pool of labor with appropriate education and skills; wage rates; energy costs; land acquisition costs; access to supporting business services; the quality of local schools, recreation facilities, climate and other amenities important in attracting and keeping skilled labor; proximity to university research facilities; quality of state and local government services and fiscal stability of government.

State and local taxes on businesses (corporate income taxes, sales taxes, local property taxes) represent only about 1.8 percent of total business costs on average for all states.[1] Corporate income taxes, in turn, are only about 9.5 percent of state and local taxes on businesses, according to one estimate.[2] A large corporate tax break that reduces corporate income tax revenue by half thus represents a cost savings to the average firm of 50 percent times 9.5 percent times 1.8 percent or just .09 percent. In other words, such a sizeable corporate income tax break would reduce total business costs by just nine-hundredths of 1 percent in the average state. 

Now let us imagine a business planning the location of a new facility. After considering all the non-tax differences between State X and other states — labor skills, energy costs, access to markets, etc. — the firm determines that State X is not the best location. It is difficult to imagine that the tiny reduction in business costs produced by even a large corporate income tax break could offset all the disadvantages in such a case and tip the balance in favor of State X, in anything but a very small number of instances. Yet this is precisely what must happen, lots of times involving lots of jobs, for the tax breaks to generate significant job growth. For all those other instances where State X is already the best location, based on all other considerations, the tax breaks obviously do not change the decision but are merely a windfall.

We need not rely on this common sense presumption that tax differences can have little effect on location decisions and state growth, however. There has been a large body of research investigating precisely this question. It is to this research that we now turn.

Research Shows At Most a Small Effect of Taxes

If taxes affect business location decisions, then states with lower taxes should experience more rapid growth, other things equal. The last phrase, “other things equal,” turns out to be crucial. Anyone can make a list of states with higher tax rates, for example, and another list with lower tax rates, and then see which set of states grew faster over some time period. Many people, in fact, have done just that, but such an exercise proves absolutely nothing about causality. Such “research” is no more useful than a “study” I conducted showing that states with names of six letters or less grew faster than ones with long names.

As we pointed out above, a great many factors influence business location decisions and state economic growth rates. To discern the separate effect of tax levels, researchers must use statistical techniques to hold all these other factors constant. The question is: If two states are similar in terms of labor skills, access to markets and materials, labor and energy costs, etc., will a difference in taxes on business produce a difference in the rate at which the state grows? Statistical techniques have become increasingly sophisticated over the past 25 years, allowing for better ways of controlling for other location determinants and more reliable answers to this question.

Two summaries of the research, in 1988 (by Newman and Sullivan) and 1991 (by Bartik), produced something of a consensus on the independent effect of state taxes on state growth. The research conclusions were expressed in terms of an “elasticity,” a measure of how sensitive growth is to taxes. The elasticity of state GDP with respect to state taxes, for example, is the percentage change in GDP divided by the percentage change in taxes. Bartik’s review of 59 studies completed prior to 1991, including 34 studies that attempted to measure the effects of business taxes on state output, led him to conclude that the bulk of the credible research indicated an elasticity somewhere between -.1 and -.6, and probably about -.3. What does this mean? It means that a 10 percent reduction in taxes will lead eventually to an increase in the state GDP of 3 percent (+3 percent divided by -10 percent is -.3).

Not everyone agreed with this consensus position. Economists Therese McGuire (1992) and Dick Netzer (1997), in particular, pointed out the inconsistencies among the studies and remained skeptical that taxes had any significant effect. Since that time, additional studies have been conducted and several summaries and reviews of those studies have been published. Phillips and Goss (1995), running a meta-regression study on Bartik’s literature, seemed to confirm the reasons for Bartik’s findings. Later in the 1990s the Federal Reserve Bank of Boston commissioned a series of reviews of the economic development literature. Wasylenko (1997), looking at the most recent tax studies as well as those reviewed by Bartik, concluded that the likely impact of taxes is somewhat smaller, an elasticity of -.2 being his best estimate. Other reviews of the literature since then indicate that the research continues to produce mixed results.[3]

One of the problems with the vast majority of studies is that they have relied on rather inadequate measures of state taxes on business, usually some measure of the average rate on all businesses. One of the most sophisticated and recent studies was based on a set of effective tax rates for 15 different manufacturing sectors, the tax rates measuring the net effect of the state and local system of business taxes and incentives on a firm’s rate of return on a new plant investment in that state (Funderburg et al, 2013). This is important, because a firm is presumably concerned about the effect of alternative locations on the firm’s bottom line, and this depends not on some overall “business tax rate” but on the taxes and tax incentives that apply to a new facility.

The data for this study covered five periods (1990, 1992, 1994, 1996 and 1998) with industry-specific and time-specific tax rates and growth rates for each of 20 states. The large number of observations allowed the researchers to effectively control for the unmeasured characteristics of each state — its climate, its location relative to markets and suppliers, energy costs, the quality of education and other public services, the regulatory system — through state “fixed effects” variables. The model measured the extent to which a state’s effective tax rate on new investment for typical firms in a particular manufacturing industry, such as transportation equipment, was a significant predictor of a state’s growth in value added in that industry. The model, in other words, was designed to detect the maximum effect of a state’s system of taxes and incentives, at the state and local level combined, on that state’s manufacturing growth.

The conclusion of this research was that the elasticity of state manufacturing growth with respect to state and local taxes and incentives was between -.35 and -.53. In other words, a 10 percent cut in total state and local business taxes on manufacturers could be expected to produce about a 3.5 to 5.3 percent increase in state manufacturing activity. This elasticity is within the range that Bartik posed in 1991. The researchers also found incentives alone had a much lower elasticity, -.12, that was not even statistically significant. This suggests that businesses discount the value of incentives heavily and pay more attention to the overall level of taxation. 

It appears that the preponderance of the evidence from many dozens of studies over a period of 30 years or more is that business tax cuts, if they could be enacted without cutting public spending or raising taxes on other sectors, have some positive effect on state economic growth, but that this effect is small. Not every study has come to this conclusion, to be sure, and some economists, such as Therese McGuire (2003), remain skeptical. She points out that many of the studies that have been relied upon the most cannot be replicated in other time periods.[4] Furthermore, no one has yet produced a plausible explanation for another consistent finding: Labor costs are many times state and local taxes, yet the elasticities found for wages are only two or three times the tax elasticities.[5] If the labor elasticities are correct, the tax elasticities should be much smaller than -.2.

What the Research Does Not Show

It is important to understand the limitations and correct interpretation of these research results. For example, an elasticity of .3 does not mean that a 10 percent cut in the corporate income tax would produce a 3 percent increase in economic activity. The corporate income tax is only about 9.5 percent of total state and local taxes on business, so a 10 percent cut in corporate income taxes is equivalent to a 0.95 percent cut in overall business taxation, which would lead to just a 0.3 percent increase in the economy (a .95 percent tax cut times the elasticity of 3 percent).

The results also do not imply that a 10 percent cut in total business taxes falling on manufacturing will lead to a 3 percent increase in overall state economic activity. They may lead to a 3 percent increase in manufacturing activity (subject to all the other caveats discussed above) but manufacturing is typically a small share of the state economy. And tax cuts for other sectors of the economy that are not “footloose” but are dependent upon serving local markets, are unlikely to produce any measurable effect on state economic activity.

Most important, the research does not imply that a 10 percent cut in taxes on business that is paid for by cutting 10 percent of the state budget would produce 3 percent growth. Such a balanced budget policy (and states of course must balance their budgets) might produce no growth at all, especially in the long run, depending on the nature of the budget cuts and their importance to economic activity.

Public Services Matter

It is important to understand exactly what the research on the sensitivity of growth to taxes implies for state policy. States must balance their budgets. Since tax breaks are costly, these costs must be offset, either by increased revenues elsewhere or by cuts in state services. Cuts in state services can increase business costs and negatively affect state growth in a variety of ways.

Researchers have studied the relation between public services and state economic growth. Ronald Fisher reviewed 43 such studies in 1997 and reported that 27 of the studies found that increased public spending had a positive effect on state economic growth. Helms (1985), for example, found that increases in taxes that financed more spending on health, highways, education or other public services contributed positively and significantly to state economic growth. Bartik (1989) found positive effects on the rate of small-business formation from additional education and fire protection spending financed by tax increases. Among all the studies Fisher reviewed, spending on transportation, education, and public safety were the services most likely to produce measurable effects on growth. The results varied widely, however, and he could not discern a consensus on the magnitude of these effects, which in some studies were smaller and in others larger than the magnitude of tax effects.

While the exact effect of public expenditure on the state economy has been difficult to pin down, it is clear that much of what state and local governments do is to provide the foundations for economic growth in the long run. There would not be a functioning economic system without the infrastructure to support it, and much of that infrastructure is provided and maintained by state and local governments: streets and highways, water and sewer systems, port facilities, airports, reservoirs. And an economic system cannot function without a healthy and educated labor force; the increasing skill requirements in the private sector cannot be met without significant commitments of resources to public education. In fact, a recent study found that the education level of the workforce in a state was the primary determinant, along with the rate of patents, of which states experienced more rapid growth in incomes from 1939 to 2004.[6] Furthermore, the ability to attract workers to new jobs, particularly for higher skill jobs in technology sectors, depends in no small measure on the quality of life, which includes the quality of the schools those workers will send their children to, and the quality of public services and public recreation facilities available.

It is important to point out, therefore, that the positive effects of tax cuts identified in the research show up for the most part only when studies control for the level of public services. This means that tax cuts promote growth holding everything else constant, including state spending on education, health, infrastructure, and public safety. Since states must balance their budgets, in practice spending cannot be held constant. As Bartik wrote in 1991: “[A]n economic development policy of business tax cuts may fail to increase jobs in a state or metropolitan area if it leads to a deterioration of public services to business. An economic development policy of tax increases may succeed in increasing jobs if it significantly improves public services to business.”[7]

Thus any estimates of the employment effects of tax breaks, even if based on an elasticity of -.3, are undoubtedly overstated. They fail to account for the negative effects of state spending cuts on the economy. And they fail to account for the very likely reduction in public sector jobs necessitated to pay for the tax breaks. These job losses would be immediate. The result is that the tax breaks would very likely produce a net loss in total jobs for several years. And this accounts only for the direct loss in public sector jobs; a long-term decline in public services would have additional negative effects on state private sector growth.

Large jobs effects are not credible for another reason: State economic growth has been shown to be more affected by the rate of new firm formation than by any other factor.[8] Most tax breaks do nothing to enhance the prospects for a new firm.

Tax Breaks Are Costly

Corporate tax breaks are a very inefficient means of promoting state economic growth. Most of the lost revenue simply flows to corporations who are doing nothing different, nothing that they wouldn’t have done anyway.[9] And this accords with common sense. As we saw, a corporate tax cut is a tiny share of a business’s costs, so that the vast majority of location or investment decisions will hinge on factors other than taxes.

Much of the benefit of corporate tax breaks will go to economic sectors that are tied to local markets: retail trade, utilities, transportation, and services.[10] These are industries that have to be where their market is. If the market grows, they will grow; state taxes have nothing to do with it, and the tax breaks are simply a windfall, with no effect on growth. In fact, the loss of public sector employment and purchasing power brought about by the tax breaks will have a detrimental effect on sectors dependent on local consumer purchases. The tax breaks to corporations do not stimulate consumer spending, and it is not clear how retailers can collect more sales tax if consumers are not spending any more money. The tiny reduction in the costs of doing business cannot be expected to translate into retail price reductions, which is the only way sales could increase in the absence of a shift in the consumer demand curve.

Yet some will claim that tax breaks more than pay for themselves. Such conclusions may follow from analyses that include personal income tax revenues from new employees in addition to the direct business taxes from the firms creating the jobs. But research shows that in the long run a large majority of new jobs are filled by in-migrants.[11] Those workers bring with them families, with children that need to be educated, and they bring cars that help to create the need for new streets and highways. If these secondary fiscal effects were fully accounted for it is likely that the additional public costs associated with increased population would eat up all of the additional tax revenue they would bring. After all, state and local governments must balance their budgets, and they do so by using the additional taxes brought by growth to pay for the additional services necessitated. In fact, it could well be that the direct fiscal effect — the change in business tax revenue associated with a tax break — is even more negative than described above, as the business activity itself may necessitate some additional investment in public infrastructure. It is clear, at any rate, that to treat new workers as if they contributed only to the revenue side of the public budget and not the expenditure side is plainly wrong and misleading.

What about the Counterarguments?

The unilateral disarmament argument: We have to do it because everyone else does.

Disarming unilaterally is easy once you recognize that the states are shooting at each other with very expensive popguns. If incentives are costly and inefficient, let your competitor states continue to squander their money on them, and pursue instead a smarter and more cost-effective approach to economic development that focuses on long-run fundamentals: quality education, job training and infrastructure.

Taxes may be a small share of costs, but they are a big share of profits so they matter a lot.

This is a complete non-issue. Certainly what matters to business is the bottom line, but the bottom line, or profit, is simply total sales minus total costs. The way states attempt to affect the bottom line is to reduce a firm’s costs, since states can do little or nothing to affect sales. Of course taxes are a higher percentage of profits than they are of costs; every component of cost is a higher percentage of profit than it is of costs. Labor costs are many times net profit. The point remains: A firm with a given level of sales seeking to maximize profit will do so by seeking to minimize total costs, and most other components of cost are far more important than state and local taxes. Thus even large changes in state and local taxes are unlikely to offset small changes in other more important costs in most instances.

We know they work, because we deal with corporations every day and they say taxes matter.

Businesses engaging in tax incentive competition recognize that it is in their interest to argue publicly, before and after receiving incentives, that taxes matter. This provides essential cover for the politicians who have provided them with the incentives that do so much for their bottom line, and for the economic development officials trying to justify their jobs and expense accounts. No one this close to the situation is in a position to assess objectively whether any given location or investment decision hinged on tax breaks. That’s why we look to academic research to see if tax breaks have actually affected state economic growth.

Economist X’s brand new study of our state’s tax breaks showed very large job effects. Generalizations based on outdated studies are meaningless.

A tax break may be supported by new research specific to the particular state and incentive in question and it will be argued that this is the only research of any relevance. In response, it can be pointed out that a business cares about another dollar flowing to profits, but not which path it took through the tax code to get there. A dollar gained is a dollar gained. There is no rationale for an assertion that a dollar of profit resulting from single sales factor, for example, is more important to a firm than a dollar of profit flowing from a reduction in the top tax rate, or some other tax code change.

Furthermore, to present one study as the definitive answer to the question about the effects of tax policy on business location decisions is to adopt a completely indefensible position on how social science research in this area should be used for policy purposes. A responsible researcher looks at the entire body of research over many years to determine which results have stood the test of time and have been replicated by different researchers looking at different places and time periods, and which studies are outliers that should be written off. Many studies have shown no effect of taxes, others have shown very large effects. But the preponderance of the evidence is that the effects are there but are small. For someone to pick one study out of the many dozens that have been conducted, a study whose results clearly put it in the category of outliers, and then to base policy recommendations on that one study is irresponsible and shows cavalier disregard for the careful use of social science in this area. To assert that all prior research is outdated is disingenuous at best. Being new is less important than being done well and being corroborated by others. That is how real science proceeds.

The unspoken political argument: Cutting incentives, or even voting against an increase, is risky because our opponents will tag us as “job destroyers” the next time a plant goes somewhere else, while increasing incentives appears costless (it’s a tax cut that creates revenue!) and we can happily take credit for all future job creation.

This is the most difficult argument of all to counter. Other than the point about tax cuts paying for themselves, the arguments are pretty much immune to fact-based criticism.


Business tax breaks are an expensive and inefficient way to attempt to stimulate a state economy. Because of the small effect of tax breaks on business costs, and the much larger importance of other production costs and location considerations, tax breaks will have little if any positive effect on private sector employment. In fact, the revenue losses may well produce immediate public sector job losses. Furthermore, the private sector employment effects of such tax cuts could be reduced or even eliminated by a long-term deterioration in the quality of public services, which themselves have been shown to be important to businesses making location decisions, and which provide an important part of the foundation for the state economy.


Bartik, Timothy. 1989. “Small Business Start-ups in the United States: Estimates of the effects of Characteristics of States.” Southern Economic Journal 55, April: 1004-18.

Bartik, Timothy. 1991. Who Benefits from State and Local Economic Development Policy? Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.

Bartik, Timothy. 1993. “Who Benefits from Local Job Growth: Migrants or Original Residents?” Regional Studies 27, 4: 297-311.

Bartik, Timothy. 1994. “Jobs, Productivity, and Local Economic Development: What Implications Does Economic Research Have for the Role of Government?” National Tax Journal 47, 4: 847-62.

Bauer, Paul W., Mark E. Schweitzer and Scott Shane. 2006. “State Growth Empirics: The Long-Run Determinants of State Income Growth.” Federal Reserve Bank of Cleveland Working Paper. May. 

Bruce, Donald, John Deskins, Brian Hill, and Jonothan Rork. 2007. “Small Business and State Growth: An Econometric Investigation.” U.S. Small Business Admininstration, Office of Advocacy, Small Business Research Summary No. 292, February.

Carroll, Robert and Michael Wasylenko. 1994. “Do State Business Climates Still Matter? Evidence of a Structural Change.” National Tax Journal 47, 1: 19-38.

Fisher, Peter, and Alan Peters. 1997. “Tax and Spending Incentives and Enterprise Zones.” New England Economic Review, March/April, 109-30.

Fisher, Peter, and Alan Peters. 1998. Industrial incentives: Competition among American States and Cities. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.

Fisher, Peter and Alan Peters. 2010. “How Taxes and Economic Development Incentives Affect Returns on New Manufacturing Investment in Pennsylvania and Surrounding States.” In Greg LeRoy et al. Growing Pennsylvania’s High-Tech Economy: Choosing Effective Investments. Washington, D.C.: Good Jobs First.

Fisher, Ronald. 1997. The Effects of State and Local Public Services on Economic Development. New England Economic Review March/April: 53-67.

Funderburg, Richard; Timothy J. Bartik, Alan H. Peters, and Peter S. Fisher. 2013. “The Impact of Marginal Business Taxes on State Manufacturing.” Forthcoming in the Journal of Regional Science, 2013

Helms, L. Jay. 1985. “The Effect of State and Local Taxes on Economic Growth: A Time Series-Cross Section Approach.” Review of Economics and Statistics 67, 4: 574-82.

Lynch, Robert G. 2004. Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development. Washington, D.C.: Economic Policy Institute.

McGuire, Therese J. 1992. “Review of Who Benefits from State and Local Economic Development Policy.” National Tax Journal 45 (4): 457-59.

McGuire, Therese J. 2003. “Do Taxes Matter? Yes, No, Maybe So,” State Tax Notes, June 9: 885-890.

Netzer, Dick. 1997. “Discussion of ‘Tax and Spending Incentives and Enterprise Zones.’” New England Economic Review (May/June): 131-35.

Newman, Robert and Dennis Sullivan. 1988. “Econometric Analysis of Business Tax Impacts on Industrial Location: What Do We Know, and How Do We Know It?” Journal of Urban Economics 23: 215-34.

Peters, Alan, and Peter Fisher. 2002. State Enterprise Zone Programs: Have They Worked? Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.

Peters, Alan, and Peter Fisher. 2004. “The Failures of Economic Development Incentives.” Journal of the American Planning Association, 70, 1: 27-38.

Phillips, Joseph, and Ernest Goss. 1995. “The Effects of State and Local Taxes on Economic Development: A Meta-Analysis.” Southern Economic Journal 62: 297-316.

Tannenwald, Robert. 1996. “State Business Tax Climate: How Should it be Measured and How Important Is It?” New England Economic Review, Jan/Feb.: 23-38.

Wasylenko, Michael. 1997. “Taxation and Economic Development: The State of the Economic Literature.” New England Economic Review March/April: 37-52.

Weiner, Jennifer. 2010.  State Business Tax Incentives: Examining Evidence of their Effectiveness. Boston, MA: Federal Reserve Bank.


[1] This is based on data averaged over three years 2005-2007 from two sources: U.S. Internal Revenue Service, Statistics of Income, Integrated Business Data for all U.S. Corporations, partnerships, and non-farm proprietorships, showing total deductions for business costs on tax returns, at,,id=152029,00.html ; and a 2009 report by the Council on State Taxation, which estimates total state and local taxes paid by businesses, available at .
[2] Council on State Taxation (see note 1). This is the average proportion over the three years 2005 to 2007; the fraction is lower in recession years.
[3] See Peters and Fisher (2004); Weiner (2010); Funderburg et al (2010).
[4] See, for example, Tannenwald (1996); Carroll and Wasylenko (1994).
[5] Lynch (2004).
[6] Bauer et al (2006).
[7] Page 8.
[8] Bruce et al (2007).
[9] The negative fiscal effects of business tax breaks and incentives at the state level have been shown in Bartik (1994); Fisher and Peters (2001); and Peters and Fisher (2002), chapter 5.
[10] According to analyses by the Franchise Tax Board, 34 percent of the benefits of the largest of the three tax breaks, SSF, would flow to utilities, retail and wholesale trade, transportation, real estate, and services. SSF was estimated to account for $1.1 billion of the $1.27 billion total cost of the three tax breaks.
[11] Bartik (1991), p. 95; Bartik (1993).


 Peter Fisher

Peter S. Fisher is research director of the nonpartisan Iowa Policy Project. He is co-director of the Iowa Fiscal Partnership and is professor emeritus of Urban and Regional Planning at the University of Iowa.

Keys to Fairly Assess the Effective Return on Investment from Public Business Subsidies


Basic RGB


The following are key factors to assessing the return on investment of public economic development programs, tax credits and expenditures.

Most importantly, it is critical to establish a credible way to estimate the degree to which any state economic development program, tax credit, or expenditure actually produced the economic activity and the degree to which the activity would have occurred anyway.This must go beyond beneficiaries’ claims about the value of the business subsidy, to hard evidence that a subsidy or set of so-called “incentives” tipped the balance to assure at least a portion of the investment. After this determination, a methodology for calculating public ROIs must address these key issues:

  • Calculate public investments in terms of public returns, not increased overall economic activity. Public returns involve increased revenue to the state (in taxes and fees) as a result of the increased business activity, and are the way to measure public (tax dollar) investments for their returns.
  • Establish a reasonable time frame for making these estimates, with returns in future years appropriately discounted. A public investment, like a private one, needs to produce returns over a reasonable time period, and future returns should be appropriately discounted.
  • Compare the return on investment in economic development expenditures with the potential gains from alternative uses of the funds. A proper analysis would account for the lost opportunities that would come from making those investments elsewhere.
  • Estimate the impact of the investment on the direct level of economic activity that is projected to occur, including any potential for displacing existing economic activity. The public interest is in net new economic activity, not displacement of one activity with another, which also can provide unfair advantages to new over existing businesses. Displacement occurs when a subsidy simply enables one business to capture an existing firm’s share of a state market that is not expanding.
  • Incorporate additional public costs, as well as benefits, from the economic activity. There may be additional public sector costs that have to be factored in, particularly for additional demands on public services and business-related infrastructure needs or workforce expansions when new economic activity draws people (and service users) to Iowa from outside the state.
  • Only count any return once, even if multiple, independent investments were made to produce it. When multiple economic development subsidies are used to produce increased economic activity, the public return from that activity needs to be apportioned among those multiple subsidy programs, so it is not counted multiple times.
  • Recognize that ROI is only one factor to consider in determining public purpose and benefit.  Some investments can produce economic gain, but at a public cost (environmental degradation or public health and safety). Others can produce public benefits in those areas.  Although these do not have a monetary value, they are important considerations in making public investments and need to be recognized in ROI analyses.
  • Audit for impact and accuracy. Estimates and claims are only estimates and claims; there needs to be monitoring for actual impact, use, and achievement of public goals.
This is a summary of an Iowa Fiscal Partnership Policy Brief, “Bang for the Buck: Calculating the State’s Return on Investments in Economic Development,” by Charles Bruner and Peter S. Fisher (January 27, 2010).

Leveling the Playing Field

Why are large multistate firms able to avoid taxes that smaller Iowa firms cannot? They can shift profits through tax loopholes. Iowa could stop it.

IFP Policy Brief

Leveling the Playing Field

How to Restore Fairness to Iowa’s Corporate Income Tax by Closing Loopholes

PDF (6 pages)

By Peter S. Fisher

Most businesses that pay corporate income taxes in this state are Iowa-based firms, and every year they dutifully pay taxes on all their business income. But increasingly these Iowa firms have found themselves competing against large multistate corporations paying little Iowa tax. These larger firms often have teams of tax lawyers and accountants devising new and better ways to avoid paying taxes in Iowa. As these firms become ever more aggressive in exploiting loopholes in Iowa tax law, the state treasury loses revenue — possibly as much as $100 million per year — and everyone else, including all those Iowa-based firms, has to pick up the tab.

Why are large multistate firms able to avoid taxes that smaller Iowa firms cannot? The short answer is that they can use a variety of devices to shift their profits from Iowa to their operations in other states where that income is not taxable. If all your operations are in Iowa, you can’t do that.

This profit-shifting can occur in Iowa because we have “separate entity” filing. By moving to “combined reporting,” Iowa would join the 20 states that have already adopted this comprehensive approach to loophole closing, including Nebraska, Kansas, Minnesota and Illinois. Four of the 20 states joined the ranks in the past three years. Combined reporting would level the playing field for small Iowa firms and large multistate companies, and reverse the sharp decline in corporate income tax revenues in Iowa over the past 15 years.[1] Combined reporting would have produced an additional $100 million in corporate income tax revenue in 2002, and $65 million in 2003, almost all of it from non-Iowa corporations.[2]

How the Profit-Shifting Loophole Works

When a firm does business not as a single entity but as a group of affiliated firms and subsidiaries, Iowa law allows the business to consider each affiliate or subsidiary as a separate business. Only an affiliate that has tax “nexus” in Iowa (sufficient business presence to make it subject to state tax) need file an Iowa tax return. This allows a firm to avoid Iowa taxes in two steps. First, it splits its operations into many affiliates with headquarters and operations in different states. Second, it sets up artificial transactions that shift profits from Iowa operations to affiliate corporations that aren’t taxable here, thereby avoiding Iowa tax on those profits.

Wal-Mart has drawn national attention recently for its use of profit shifting to avoid millions of dollars in state taxes across the country. Wal-Mart set up an affiliate firm, Wal-Mart Real Estate Business Trust (WMREBT) and transferred ownership of many (possibly most) Wal-Mart stores to WMREBT, including many in Iowa. A Wal-Mart store then leases the space from WMREBT. This rental expense is deducted from the store’s income, reducing its state income taxes.

Why isn’t the income of WMREBT taxable in Iowa, since that firm owns property in Iowa (giving it tax nexus)? Because it is a Real Estate Investment Trust, or REIT; Congress gave REITs a special exemption from federal income taxes, and states have followed suit. The rental income of REITs is exempt from federal and state corporate income taxes no matter where the REIT is located.

The Wal-Mart REIT then distributes its profits as dividends to the shareholders in the REIT, including about 100 Wal-Mart executives. The executives each own only one share in order for Wal-Mart to take advantage of the loophole: The tax exemption was intended to allow small investors to get into real estate, so the REIT must have over 100 members. The vast majority of the shares of WMREBT, however, are owned by a “shell” corporation, Wal-Mart Property, set up by Wal-Mart in Delaware. Delaware doesn’t tax intangible income such as dividends received by corporations, so the funds remain tax free. Wal-Mart Property then pays dividends to Wal-Mart Stores East, another Delaware Corporation, which is a 100 percent subsidiary of Wal-Mart Stores Inc., headquartered in Bentonville, Arkansas. This dividend income received by Wal-Mart is also tax free because of another federal (and state) tax provision: Dividends from subsidiaries are exempt from taxation. The Delaware shell corporation is necessary because some states, and the federal government, do tax dividends received directly from REITs. Because Wal-Mart receives them indirectly, they look like regular dividends. It is highly likely that Wal-Mart is using this tax ruse in Iowa, because stores here are owned by WMREBT. [3]

By paying rent to itself, Wal-Mart is able to dodge its state tax responsibility. A portion of store profits that would normally accrue directly to Wal-Mart Stores Inc. in Arkansas is sent (in the guise of rent) on a detour through three shell corporations set up in Delaware. Profits are transformed into dividends received free of state taxes by the parent firm in Bentonville. The states are left with far less Wal-Mart profits to tax. According to a Wall Street Journal article, Wal-Mart escaped an estimated $350 million in state taxes over four years through the adoption of the REIT strategy.[4]

Wal-Mart is not the only firm to adopt this strategy, and the loss in state tax revenue has prompted a number of states to try to plug this loophole or pursue legal action to recover taxes owed. Maryland Comptroller Peter Franchot is quoted as saying, “It’s an abuse that allows big companies to cheat on state taxes, and it’s wrong, so we’re going to begin to audit these companies. … These practices are going to no longer be permitted, and we’re going to seek to level the playing field for all Maryland businesses.”[5]

There are several other devices used to shift profits out of Iowa. To see how three of these work, imagine a manufacturing firm, Apex Corporation, that assembles garden tractors at a plant in Iowa. The engines are made by a subsidiary firm, Baker Co., in the state of Nevada, which has no corporate income tax. The parent corporation of both firms, Cutter Inc., is also located in Nevada.

The first profit-shifting device employed by Cutter relies on inter-company pricing. The engine manufacturer, Baker, sells its gas engines at prices well above market to the Apex garden tractor subsidiary in Iowa. This raises the costs of Apex Corporation, and lowers its reported Iowa profit and hence Iowa income tax. At the same time, the high prices make Baker Co. very profitable, but this firm is not taxable in Iowa and pays no income tax in Nevada. Thus the profits of Apex are transferred to Nevada tax-free through this internal pricing gimmick.

A similar strategy involves management fees. The parent corporation, Cutter, provides managerial consulting services to Apex, for which it charges very high fees. These fees are a deductible expense for Apex, once again lowering its Iowa profits and taxes, shifting them to the parent corporation, which pays no taxes on them in Nevada. The same result can be achieved through loans from the parent corporation to Apex. Apex is charged a high rate of interest on these loans, and that interest is a deductible expense, once again lowering its Iowa profits and Iowa tax, and shifting those profits to the parent firm where they go untaxed.

One of the most notorious devices for shifting profits involves the use of PICs (Passive Investment Companies). Toys ‘R’ Us stores, for example, set up a subsidiary firm in Delaware called Geoffrey Inc., a shell corporation that does nothing but own the trademark and license it to the retail stores. Geoffrey receives royalties from the stores for use of the name Toys ‘R’ Us, and these royalties are tax free because Delaware does not tax royalties or other intangible income. Meanwhile, the retail stores show smaller profits because they can deduct the royalty payments as an expense. This shifts profits from the states where the stores are located to Delaware, where they appear as tax free dividends. Numerous firms have used the PIC scheme to avoid millions in state taxes, including many with stores in Iowa (K-Mart, Home Depot, Burger King, Sherwin Williams, Staples, and others). There are thousands of Delaware PICs, and over 130,000 corporations in Nevada with no employees, many of which could be PICs.[6]

Closing the Loophole with Combined Reporting

In 16 states, none of these profit-shifting strategies have worked. These states have had combined reporting for many years. They include four states surrounding Iowa: Nebraska, Kansas, Minnesota and Illinois. Four more states have recently passed legislation to close these loopholes. Combined reporting became effective in Vermont for the 2006 tax year, and in Texas for 2008. West Virginia and New York adopted combined reporting this year, effective in 2009 and 2007, respectively. Bills have been introduced in Maryland and New Mexico in the current legislative sessions and the governors of Michigan, Massachusetts, Pennsylvania and North Carolina, as well as Iowa, have recommended adoption of combined reporting.

Instead of allowing separate-entity filing, these states require all corporations in an affiliated group to combine their income and expenses in calculating their corporate income tax. If Iowa were to adopt combined reporting, all of those profits shifted to the Wal-Mart Real Estate Business Trust or to Baker Corp. or to Geoffrey Inc. would be included, along with all the profits of the corporate affiliate with operations in the state. Then the combined profits would be apportioned to Iowa according to the percent of total company sales transacted in Iowa.[7] Thus inter-company pricing and lending, management fees, trademark leasing, and property renting through an REIT — none of these devices matter because the profits get counted by Iowa anyway.[8]

Combined reporting effectively closes all of these profit-shifting devices, and many future ones companies and their tax lawyers might invent. With combined reporting the state would also save money and staff time devoted to challenging tax returns and taking corporations to court; many of the issues the state ends up litigating would be resolved by combined reporting.

The Iowa Department of Revenue estimated in 1994 that there would have been a minimal gain in revenue in 1992 and 1993 if combined reporting had been in place. But the department’s most recent report shows that an additional $99 million in corporate income tax revenue would have been generated in tax year 2002 if combined reporting had been in effect, and $62 million in tax year 2003.[9] In both years, 99 percent of the increased revenue would have come from non-Iowa firms (that is, firms headquartered outside Iowa). In both years, 75 percent of businesses filing an Iowa corporate tax return would have been unaffected by combined reporting.

Objections to Combined Reporting

Some will argue that the shift to combined reporting amounts to a tax increase, and that higher business taxes will hinder economic development. There are several problems with this argument. First, combined reporting is more accurately described as a method of restoring tax levels to where they were before aggressive corporate “tax planning” began in earnest to erode revenues. The corporations whose tax liabilities will be affected the most are those who have been using profit shifting gimmicks to avoid Iowa taxes. The vast majority of firms filing an Iowa return are unaffected by combined reporting. In fact, local downtown businesses in Iowa that may have to compete with companies like Wal-Mart likely would benefit from combined reporting, since they would be on a more even playing field. Some firms will even pay less in taxes.[10]

Second, state corporate income taxes are a very small part of the cost of doing business in a state and have little to do with where businesses expand, as has been well-documented elsewhere.[11]

WelcomeThird, it hardly seems fair to the majority of corporate income-tax payers that must pay tax on all their income to promote an economic development strategy that amounts to posting signs at Iowa’s borders saying, “Welcome, Multistate Corporations: Cheat on Your Taxes Here.”

Finally, combined-reporting states have, in fact, done well economically. California has the longest history with combined reporting (60 years), and an economic growth rate over that period that would be the envy of many states, including Iowa. If we look at states with a corporate income tax, only 10 of them have experienced positive growth in manufacturing employment over the past 15 years, and nine of those 10 were combined-reporting states.[12]

Opponents of combined reporting often argue that Florida adopted it, and then repealed it because it was economically harmful to the state. What they do not mention is that Florida’s version of combined reporting was quite different from that adopted by all other states.[13] Furthermore, it was abandoned because of intense political pressure from the Reagan administration, and before it could have had any effects on the economy one way or the other.

Some argue that Iowa has a perception problem when it comes to the corporate income tax: We have the highest top tax rate in the country (12 percent). Despite this, the effective corporate rate is actually quite low because of federal deductibility and single-factor apportionment. Iowa ranks almost last among the states in corporate income taxes as a percent of state business activity.[14] A portion of the revenue gain from combined reporting could be used to lower the top rate, so that the perception of corporate tax levels in Iowa is brought into line with the reality – or it could be used to lower taxes on hard-working Iowa families who are much more in need of tax relief than multistate corporations.[15]


Combined reporting would level the playing field, taxing both the small Iowa firm and the large, multistate corporation on all income earned in Iowa. It would go a long way to restoring the corporate income tax in Iowa to its position as a significant revenue source, and would prevent further erosion of the tax as more and more companies aggressively pursue tax avoidance strategies. By discouraging such strategies, combined reporting also would enhance enforcement efforts by the Department of Revenue.

Governor Culver and Governor Vilsack before him both have recognized the need for corporate income tax reform and called for combined reporting. The General Assembly should consider making this part of its tax reform efforts.

2010-PFw5464Peter S. Fisher is research director of the Iowa Policy Project. He is a Professor in the Graduate Program in Urban and Regional Planning at the University of Iowa. A national expert on public finance, his reports are regularly published in State Tax Notes and refereed journals.

[1] Peter Fisher, “Revitalizing Iowa’s Corporate Income Tax,” Iowa Fiscal Partnership, April 2006.
[2] Jay Munson, “Combined Reporting: An Option for Apportioning Iowa Corporate Income Tax,” Iowa Department of Revenue, March 2007.
[3] A spot check of county property tax records for 18 Iowa Wal-Mart stores found that all but two were listed as owned by Wal-Mart Real Estate Business Trust, with an address of 1301 SE 10th St., Bentonville, Arkansas. This is the principal place of business, even though the trust is incorporated in Delaware. The other two owners were listed as Wal-Mart Stores and Wal-Mart Realty Co, but with the same address as WMREBT (whereas Wal Mart Stores Inc., the corporate headquarters, is at 702 SW 8th St., Bentonville). At least one Wal-Mart store in Iowa, the supercenter in Oskaloosa, is operated by Wal-Mart Stores East, and probably most or even all are. It seems a safe presumption that Wal-Mart has transferred ownership of its Iowa properties to WMRBT for the purposes of avoiding state taxes.
[4] Jesse Drucker, “Wal-Mart Cuts Taxes by Paying Rent to Itself,” The Wall Street Journal, Feb. 5, 2007.
[5] Tricia Bishop, “Franchot to change policy on REIT rents,” Baltimore Sun, March 6, 2007.
[6] Michael Mazerov, “Growing Number of States Considering a Key Corporate Tax Reform.” Washington, D.C.: Center on Budget and Policy Priorities, April 5, 2007.
[7] Iowa, as do all states with a corporate income tax, uses a formula to apportion the income of a multistate business to Iowa, to determine the share of the firm’s total profit that is Iowa taxable income. Iowa apportions income entirely on the basis of sales. If 25 percent of a firm’s sales are destined to Iowa, then 25 percent of that firm’s profits are taxed in Iowa.
[8] If there are foreign affiliates in the group of firms, the dividends from the foreign affiliate would not be counted. Combined reporting as practiced by 17 U.S. states means “waters edge,” not worldwide, combined reporting.
[9] Jay Munson, “Combined Reporting: An Option for Apportioning Iowa Corporate Income Tax,” Iowa Department of Revenue, March, 2007.
[10] Corporations that have an out-of-state affiliate that is losing money could end up paying less Iowa tax if the affiliate must be included under combined reporting.
[11] See, for example, Peter Fisher and Elaine Ditsler, “Taxes and State Economic Growth: The Myths and the Reality,” Iowa Policy Project, May 2003; Robert Lynch, Rethinking Growth Strategies : How State and Local Taxes and Services Affect Economic Development, Economic Policy Institute, 2004.
[12] Michael Mazerov, “Growing Number of States Considering a Key Corporate Tax Reform.” Washington, D.C.: Center on Budget and Policy Priorities, April 5, 2007.
[13] Florida adopted worldwide combined reporting, not “waters edge” combined reporting that combines only U.S. affiliates.
[14] Peter Fisher, “Falling Below Average: Why Iowa Taxes Are Competitive,” Iowa Fiscal Partnership, February 2007.
[15] See the IFP backgrounder, “Next Piece of the Puzzle: After Minimum Wage, Iowa Looks at Earned Income Tax Credit,” March 2007.