Working in Iowa
The Return on Indifference
Jan 6, 2010
By Dave Swenson
By Dave Swenson
The phrase “return on investment” or ROI entered government official vocabulary in the early 2000s. Of late the phrase was used over and over again at a series of state government hearings on the ROI value of the many state government programs that receive tax credits in Iowa. This public process follows the Iowa Film Credit fiasco as well as a state report on all of the state’s tax credits that actually found it nearly impossible to quantify the cumulative gains to society the many, many tax credits Iowa allows special interests were supposedly purchasing.
Over and over again the state officials collecting testimony from the various tax credit recipients asked for declarations of society’s benefits from the program they were representing. Advocates for historical preservation, young farmers, research and scientific activity, and major industrial groups all proclaimed a much better-off Iowa as a result of the state’s prudent investments in their particular special and very important concern. Strong returns all around, even in the film industry.
The ROI expectation began back when then Governor Vilsack increased economic development spending and programs as he moved into his second term, but a somewhat skeptical Iowa General Assembly wanted objective measures that state spending was effective. They tasked the Iowa Department of Economic Development with producing those objective measures, and the IDED, in turn, assembled a team of university and other researchers to develop an evaluation framework to help make funding decisions.
Armed with university-developed evaluation tools, state officials assured legislators that there were appropriate ROIs on all of their programs. The university-developed evaluation tools, however, did not produce ROI conclusions. The IDED added that component themselves. It was all smoke and mirrors because Iowans are not investors and they do not receive returns.
We can parse this. My 401K is a tangible investment designed to produce a schedule of payments to me over time and to increase in value so long as I manage my accounts prudently. So are my other investments. If I am mindful of what I am doing, I will try my mightiest to protect my original investments while receiving a dividend or some other type of meaningful gains for the risks that I am assuming. Over the short or the long run those decisions yield sets of ROIs given the mix of investments I have made. These are examples of tangible investments with tangible returns. I know they are tangible because I must pay taxes on them annually.
On the other hand, if I say, colloquially, that I am going to invest in my health by joining a gym, or that collectively we spend money on education because it is an investment in our children, we are using the word differently. Indeed there are returns to be expected in terms of my own personal wellness or our children growing up to be productive employees and informed participants in society. The returns, however, are not well measured in dollar terms, nor do they link well with the money that we have spent.
Nonetheless, our legislators and our state officials have slowly but quite decidedly shifted into calling major government expenses investments. We don’t build and sustain our highways; we invest in transportation. We talk about investing in job development, renewable energy, and higher education. We even call traditional government assistance to the families in need, old fashioned welfare, the Family Investment Program. When you call it an investment it sounds so much better.
In using ROI as the foundation for evaluating its credit programs, however, the state of Iowa is declaring that Iowans have a tangible stake in an economic outcome that is reasonably proximate to that original spending amount. The implicit promise is that over some period of time, the taxpayer is made, individually or collectively; better off as a result of the initial investment. There is therefore an assumption of a beneficial return to the persons that bore the initial costs.
Except the returns that are claimed have nothing to do with the original investment. In short, the returns are jobs, or total capital spending, or federal funds leveraged. They are not payments to the investors, i.e., the taxpayers. They are, instead, primarily gains to the recipients of the credits.
The taxpayer is not receiving a return, but the recipients of those returns have long counted on taxpayers and for that matter legislative ignorance of exactly who was bearing the costs to all of this and who were receiving all of the gains.
Many of Iowa’s taxpayers, until this year, were blissfully indifferent to this. And the recipients of those credits were counting on that indifference lasting forever.
For a period of time the return on Iowans’ indifference was wonderfully lucrative to the state’s business community and a host of special interests. It promises to be much more meager in upcoming years.
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Dave Swenson is a long-time analyst of Iowa political, social, and economic issues. He is a staff research economist at Iowa State University and an extension-to-communities economics educator. He also teaches community and regional planners (those nefarious agents of totalitarian control) how to do economic things in their profession.
