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Perils of Public Payment for Private Projects

Nicholas Johnson

July 22, 2005

Executive Summary: When a governmental body gets involved in for-profit, private development or business operations, whether by way of eminent domain, subsidies, construction of infrastructure or tax breaks, it can raise a number of concerns. They are illustrated by four pieces that appeared in the Des Moines Register July 21 and 22, 2005, discussed and reproduced below. Examples of those concerns include:

1. Ideological and economic concerns. Many believe that eminent domain and tax revenues are most properly limited to traditional governmental functions, such as roads and schools. Private business, as distinguished from socialist enterprise, is defined by them as institutions that operate without government subsidies or other financial assistance. Distorting business decision-making with such "bribery" may actually do the business, indeed the entire state's economy, more harm than good. Clearly, the market is distorted and competitors are disadvantaged when one of their number benefits from corporate welfare and the rest do not.

2. Sloppy or non-existent business plans. One of many advantages of the pure, free private enterprise marketplace is that those making the decisions have a real stake in their consequences. Stock and bond holders, venture capitalists, and bankers want to make sure they get their money back and more. They have a real incentive to insist on well-thought-out projections of cash flow and return on investment. Government officials may be professionally skilled; they may want to make wise decisions; but they simply cannot have the same motivations as those whose money is involved.

3. Selection concerns; corruption. If the comparative potential of proposals to produce personal (or institutional) profit is not the motivating factor for decisions regarding government largesse, it's often difficult to discover what is. The decision-making process may not be fully open. Even the most honest and transparent process may not clearly reveal the prioritization and decision-making standards and algorithms that have been used (if any). Moreover, given the relative lack of standards, oversight and openness, the process is subject to conflicts of interest and corrupting influence.

4. Wasteful spending. It is difficult to know when financial assistance is really necessary, or effective, in attracting a business that might otherwise have gone elsewhere, or keeping one that threatens to leave. If the business decision would have been the same without government funding the payment has been wasted.

5. Broken promises and accountability. Promises of return on taxpayers' money in the form of "good jobs," further expansion, and a resulting increase in taxes paid by businesses, aren't always made good. Sometimes there's a deliberate, manipulative over-promising; sometimes things just don't work out in spite of the best of intentions. A business may fail, be sold, or move out of state. Taxpayers can be short-changed. Follow-up is essential. How closely does ultimate reality mirror initial expectations and promises? Are these programs delivering, in fact, what their promoters claim?

6. It's not about jobs. Transfer of taxpayers' money to private business owners is often justified as the creation of jobs. There are a number of questions about this assertion. If the government wants to create jobs it is perfectly capable of doing so directly, with programs like the Civilian Conservation Corps during the 1930s depression, or even the military (somewhat short on recruits in 2005). If the business sector wants to retain skilled workers in Iowa it has an easy solution at hand: increase the pay and permit unionization. If the government wants to help make up that difference it can do so directly (as is done in Switzerland) rather than letting the money "trickle down" from wealthy owners to workers. The jobs may have been there all along, and funny numbers are used to show an increase. The jobs may be short-term, as with construction projects. They may turn out to be at minimum wage, or only slightly higher, pay. They may be created, only to vanish soon thereafter, as operations are curtailed or moved overseas.

7. Relocation is not economic growth. In a competitive marketplace, attracting new businesses, or retaining those threatening to leave, doesn't generate new wealth or jobs; it simply locates them in one place rather than another. If that relocation is into Iowa and from a neighboring state, it may help Iowa's economy by hurting that of a neighbor. If it is from one place in Iowa to another, or in a business with relatively inelastic demand, the jobs and profit of a new business are an illusion; they are often no more than the other side of an equation reflecting the profits and jobs lost by other businesses in that area.

These seven themes will be found in the discussion of the news stories and editorials that follows.

# # #

Occasionally a number of otherwise unconnected events, or media stories, come together in ways that help to create useful insights.

The July 21 and 22 issues of the Des Moines Register contained four such pieces.

One reported that over $1 million was transferred from Iowa taxpayers to the bottom line of businesses (David Elbert, "State Grants, Loans Given to 8 Companies," July 22).

Another disclosed that state legislators want to limit the ability of governments to take the property of homeowners and small businesses and transfer it to private developers (Tim Higgins and Jonathan Roos, "GOP Wants Limits on Eminent Domain," July 22).

Meanwhile, a day earlier two letters to the editor were also discussing government funding of projects (Alan Kline, "Polk's Reckless Events Center Financing Plan" and Stacey Cargill, "Need Tool to Measure Gambling Claims," July 21).

The political left has a way of splintering into a wide spectrum of organizations, each of which is thereby able to claim a more refined level of political purity, which usually results in little more than the resulting victory of Republicans. Conservatives seem better able to avoid such self-destructive tendencies, but "conservative" is not a monolithic ideology either. Sometimes it means relaxing regulation in ways that put the interests of development and business over those of workers, consumers, and environmental protection. Other conservatives may think nothing more "conservative" than putting land into public parks and forests, thereby "conserving" them for future generations.

This conflict recently burst forth in a Supreme Court opinion testing the constitutionality of a city's use of "eminent domain" to take private property from one group of citizens only to hand it to another, for "development." If "conservative" means promoting development and business, a conservative would support this use of eminent domain. On the other hand, if "conservative" means keeping the government off of my land, a conservative would be outraged at such a seizure of private property.

The case was the June 23 decision in Kelo v. City of New London. And once the dust had settled the 5-4 vote for the city found the "conservative wing" of the Court voting against the interests of big business and developers, and the "liberal wing" voting for the developers.

In response, Iowa's conservative legislators, as well as those in other states, seek to win in the legislatures what they lost in the Court. They want to restrict government's power to take property to the original notions of eminent domain: the "public purposes" of traditional governmental responsibilities for roads and bridges, schools and libraries, monopolistic utilities and military bases. Tim Higgins and Jonathan Roos, "GOP Wants Limits on Eminent Domain," July 22.

It is, at a minimum, a reasonable position. But it is also one seemingly at ideological odds with the very long list of Iowa Department of Economic Development programs that are often supported by those describing themselves as conservatives. That is, if it is wrong for a governmental unit to take my land and hand it over to a private developer, why is it OK for that same government to take the taxes I've paid and turn them over to a private business person, to further enrich him or her in their new or continuing venture? This is just one of the questions raised by the juxtaposition of the two July 22 stories, David Elbert, "State Grants, Loans Given to 8 Companies" and Tim Higgins and Jonathan Roos, "GOP Wants Limits on Eminent Domain."

This is, of course, not the only available example of hypocrisy within our political ideologies and governmental policies. Nor is it one easily rectified.

The Register has editorially acknowledged the necessity of Iowa continuing to compete with the other states in this game of give-aways to private business, "Iowa . . . can't really unilaterally disarm in the war between the states for what's called economic development." Editorial, "Congress Should End States' Business Giveaways; Full Accounting Needed of Tax Breaks, Other incentives," Des Moines Register, June 8, 2005. But it doesn't like the practice: "Ideally, businesses would locate their operations where it made the most economic sense. They would rely on private investors -- not the taxpayers -- to bankroll their expansions. That's how a market economy is supposed to work. . . . Nationally, the bidding war between the states is a zero sum game. It adds nothing to the economy; it merely relocates operations. To the extent that market forces are distorted by state incentives, they might actually harm the economy. That's why the federal government should impose a moratorium on state incentives that affect interstate commerce."

The editorial went on to highlight some very pragmatic problems associated with passing out tax money to private businesses. It's just "bribing businesses to do what they might do anyway [and] making taxpayers captive investors in businesses from which they derive no direct return on their investments. . . . It's impossible to do an accurate accounting of [the programs, and] no one really knows whether the programs work. . . . It can never be known whether those jobs [supposedly created by the grants] would have been created anyway." An earlier letter to the editor made a similar point about jobs, Joe Van Ginkel, "Corporate Welfare Rarely Produces Jobs,"Des Moines Register, March 1, 2005.

The Register followed up on the "no one really knows whether the programs work" point in Editorial, "Follow Illinois' Lead in Tracking Incentives; Law Builds Accountability Into Economic Development," Des Moines Register, June 14, 2005 (the editorial reported on a system of accountability Illinois had put in place that the Register thought would be a good idea for Iowa). It had earlier carried a story questioning the assertions of economic benefit from the Iowa Values Fund: Associated Press, "Iowa Values Fund; Drain, Not Gain, Forecast for Big Incentive Awards,"Des Moines Register, January 28, 2005.

These are directly analogous to the issues raised in the July 21 letter to the editor, Stacey Cargill, "Need Tool to Measure Gambling Claims" ("Gambling proponents boast that casino spending generated $263 million in state, county and city taxes. More than half the money spent is from out-of-state gamblers, and 'casinos continue to be a premier entertainment destination for a lot of people' ('Casinos Take in Record $1 Billion,' July 13). Assuming this is true, what tool do we use to measure the truth of these claims?").

Alan Kline, "Polk's Reckless Events Center Financing Plan," makes a couple of related points. He notes that it is a "myth that anyone who opposed the initial proposal for the Events Center is some stick-in-the-mud who opposes change. This is simply not true."

Promoters and propagandists, whether political or corporate, all too often respond to concerns and questions by attacking the critic rather than the criticism. A common attack, as Kline notes, is that those seeking more information, or exhibiting skepticism, simply oppose all change.

Kline continues, "I would have voted against the proposal as it was stated at that time, not because I opposed the concept of the Events Center, then or now, but because I opposed the irresponsible, reckless plan the Polk County Board of Supervisors offered for financing the project. The supervisors could not then, nor can they now, guarantee Polk County taxpayers that the project would stand on its own without the crutches of Prairie Meadows and property-tax revenues. There were, and are, too many ifs, maybes, and we hopes in the proposal."

There you have it: two days' of stories and commentary in one newspaper that give rise to the seven concerns in the opening "executive summary." These are difficult issues; knee-jerk responses aren't very satisfactory. And they show little sign of being soon resolved.

The full text of the stories follows.


[Note: The four items below are copyright by the Des Moines Register, and are reproduced here as a matter of "fair use" for non-commercial, educational purposes only. Any other use may require the prior approval of the Des Moines Register.]


State Grants, Loans Given to 8 Companies
The $1 Million Worth of Benefits Includes Tax Credits for Some

David Elbert

Des Moines Register

July 22, 2005



The state awarded eight companies grants, loans and tax benefits worth more than $1 million Thursday for projects expected to create about 390 Iowa jobs with annual pay totaling more than $15 million.

The Iowa Department of Economic Development's board of directors awarded the largest grant - $500,000 - to Walsworth Publishing of Council Bluffs, which plans to move an Omaha printing company it purchased to Council Bluffs at a cost of $7 million. The relocation will bring to Iowa 183 jobs that pay an average of about $27,850 a year, for an annual payroll of nearly $5.1 million.

Others receiving grants:

Meredith Corp. of Des Moines will receive $300,000 for moving 69 jobs from New York that will pay an average of $60,900 a year. The jobs stem from Meredith's $350 million acquisition of the U.S. operations of Gruner + Jahr, which includes Family Circle magazine. The new jobs amount to a payroll of $4.2 million a year.

Mortgage Hub Inc. would receive $150,000 to move 23 mortgage servicing jobs paying an average of $73,250 a year to Urbandale, creating an annual payroll of more than $1.6 million.

Three companies were awarded Enterprise Zone tax benefits that eliminate sales and use taxes on construction costs, as well as provide tax credits for investments and research and development expenses. They are:

Natural Nutrients, a subsidiary of a Texas company, which plans to locate a $19 million plant in Corning to refine glycerin from byproducts of ethanol and biodiesel plants. The plant will employ 30 people at an average pay of about $32,000 a year, for an annual payroll of about $960,000.

Josephson Manufacturing Co., a Fort Dodge radiator maker, which plans a $1 million expansion that will add 20 jobs paying about $25,800 a year each, for an added payroll of about $516,000 a year.

Rasmussen Mechanical Service Corp., which will relocate 34 jobs paying an average of $44,800 a year in Council Bluffs. Added payroll: about $1.5 million.

Receiving loans were:

Mob Shopper, a Davenport start-up that will help businesses reach customers via cell phone text messaging. It was awarded a $125,000 loan to create 12 jobs paying an average of about $32,500, for annual payroll of $390,000.

PopStar Networks Inc., a Des Moines start-up that sells displays to retail stores. It will receive a $100,000 loan to create 20 jobs playing an average of about $48,500 a year, for an annual payroll of about $970,000.


GOP Wants Limits on Eminent Domain
House Republicans Want to Make Sure Cities Take Property Only for Public Works

Tim Higgins and Jonathan Roos

Des Moines Register

July 22, 2005



Iowa House Republicans want to limit cities' power to take property for private developers despite a U.S. Supreme Court ruling that the act can benefit the public.

"It is frightening to think that the government can confiscate someone's home simply because it will result in higher tax receipts," House Speaker Christopher Rants, a Sioux City Republican, said.

A handful of states forbid "eminent domain" for economic development unless it eliminates blight. Lawmakers in other states are working on legislation to better protect property owners.

"I think it would be a bit premature for the states to try to fashion a state-by-state response, given the fact there is legislation pending or will be pending in Congress to provide a national response," Gov. Tom Vilsack said.

Democratic Sen. Jack Hatch of Des Moines said eminent domain is a useful tool.

"You have to be careful, you have to show prudence, you have to convince people that there is a public good," Hatch said.

Supreme Court justices last month refused to overturn a Connecticut law that allows governments to take private land to help economic development and generate taxes.

Iowa has a similar law.

Iowa Republicans said Thursday they want to better define when cities can use the power and ensure it's only for public projects such as roads and schools.

"A local government should not be allowed to take a property and give it to someone else simply because they like that person better or because they think it might increase their property tax base," said Rep. Kraig Paulsen, a Republican from Council Bluffs.


Polk's Reckless Events Center Financing Plan

Alan Kline

Des Moines Register

July 21, 2005



Regarding Marc Hansen's July 12 column on the Iowa Events Center ("Face It: A Modern City Needs a Vibrant Arena"): Apparently, Hansen believes in the old adage that if one repeats the same myth often enough, it becomes true. Hansen continues to spread the myth that anyone who opposed the initial proposal for the Events Center is some stick-in-the-mud who opposes change. This is simply not true.

Hansen correctly stated there would have been considerable opposition to a bond referendum had the Iowa Supreme Court followed the law and allowed the election to take place. I would have voted against the proposal as it was stated at that time, not because I opposed the concept of the Events Center, then or now, but because I opposed the irresponsible, reckless plan the Polk County Board of Supervisors offered for financing the project.

The supervisors could not then, nor can they now, guarantee Polk County taxpayers that the project would stand on its own without the crutches of Prairie Meadows and property-tax revenues. There were, and are, too many ifs, maybes, and we hopes in the proposal.

Hansen needs to do his homework. The Supreme Court said nothing about the Events Center being an expansion of Veterans Memorial Auditorium. The case was based on the claim of the Events Center being an "essential public purpose."

Hansen smugly derides those who can't understand how anyone would pay "three figures" for concert tickets at the Events Center. The prices for most of the events announced so far are out of the question for most working people around here. They have to be to cover some of the excessive costs of the project.

The Iowa Events Center stands as a shining example of why people in Polk County don't trust county government.

-Alan Kline, Des Moines.


Need Tool to Measure Gambling Claims

Stacey Cargill

Des Moines Register

July 21, 2005



Gambling proponents boast that casino spending generated $263 million in state, county and city taxes. More than half the money spent is from out-of-state gamblers, and "casinos continue to be a premier entertainment destination for a lot of people" ("Casinos Take in Record $1 Billion," July 13).

Assuming this is true, what tool do we use to measure the truth of these claims? During the 2004 legislative session, our state government earmarked $100,000 in taxpayer dollars to fund a socioeconomic study. It was to evaluate the impact of gambling on our economy, crime, business and families.

The contract was awarded to the University of Northern Iowa. According to a peer review provided by Earl Grinols, professor of economics at Baylor University, the study is "inadequate" in providing benefit and social-cost data.

Therefore, we do not have a tool to measure the benefits and costs. How will Iowans know if these statements are true? One-sided claims made by gambling proponents do not prove this is good for Iowa and its economy.

-Stacey Cargill, chairman, One Voice Iowa, West Des Moines.