Smart Economic Development Choices for Iowa
Keep High Quality in High Quality Jobs
A look at proposed reforms of Iowa economic development programs
By Colin Gordon

February 27, 2014
IPP Backgrounder (2 pages, PDF)

The Iowa Economic Development Authority (IEDA) administers a number of business assistance and incentive programs. These include programs that target certain kinds of business, certain business activities, or certain parts of the state. And the assistance offered includes both loans and grants, and a wide array of tax breaks and tax credits. The expectation running across these programs is that state expenditures (or forgone taxes) will encourage investment and job creation that would not otherwise have occurred or retain investment and jobs that might have disappeared.

As we have argued in reports that looked closely at the Iowa Research Activities Credit, the Enterprise Zone Program, and the administration of the Iowa Values Fund, IEDA programs suffer from a number of common and persistent problems.
• The core assistance programs are costly and their benefits are hard to gauge — especially as we have no reliable way of measuring what new investment is galvanized by public assistance, and what new investment would have occurred anyway.
• The standards, for both job creation and job quality, are too low. In some cases the cost per job of public assistance is much too high; in other cases, public money is used to subsidize low-wage, low-benefit employment.
• Programs are poorly targeted. The benefits often flow to firms, or to parts of the state, which don’t need assistance.

Drawing on this body of research, we offer a cautionary analysis of House Study Bill 542, and the companion in the Senate, SSB3129, which proposes to repeal the state’s Enterprise Zone (EZ) Program, and in its place relax the wage standards for state’s High Quality Jobs (HQJ) Program. The first element of this proposal is laudable: The enterprise program has developed such elastic and expansive criteria for “economic distress” that we now have over a thousand such zones scattered across nearly half of the counties in the state. Because this program brought with it meager wage standards (as low as 90 percent of the county or regional average), it had the effect of using public money to bid down local wages.

But the study bill proposes to dilute the HQJ program by carrying over some of the worst elements of the EZ program. Our principal concern is the effect that this will have on the HQJ’s already meager wage thresholds. At its inception, the HQJ program set a wage threshold of 130 percent of the county or regional wage. In 2012, this was lowered to 120 percent of a new baseline “laborshed” wage. The calculation of the laborshed wage is quite opaque: It divides the state into 123 overlapping laborsheds; excludes public, retail, health care, social assistance, accommodations and food service wages; and includes only those wages within two standard deviations of the mean wage. [1]

The end result of this calculation is mixed. The exclusion of several low-wage sectors brings up the threshold wage, although in 92 of 123 laborsheds, that threshold is lower than the statewide hourly median wage ($15.91). The threshold is higher (and generally above the median) in the laborsheds in and around Iowa’s urban areas (where much of the state’s population resides). When the wage threshold is examined by zip code, we find that a little over half of the population of the state resides in a zip code where the threshold wage is above the statewide median. This seems to us an unusually elaborate way of cementing local wage patterns, rather than using public subsidies to raise the wage floor — in the lower-wage laborsheds or across the state.

More troubling is the range of exceptions to the 120 percent threshold that the proposed bill would introduce:
• It would allow projects in “economically-distressed” areas to pay only 100 percent of the laborshed wage.
• It would allow projects in “grayfields” (whether or not they are located in economically distressed areas) to pay only 100 percent of the laborshed wage.
• And it would allow projects in “brownfields” (whether or not they are located in economically distressed areas) to pay only 90 percent of the laborshed wage.

These exceptions are all the more troubling, because their definitions are so expansive. At present, the EZ program designates a county as “economically-distressed” if it ranks in the bottom 25 of all Iowa counties, as measured by the average monthly unemployment level for the most recent 12-month period or the average annual unemployment level for the most recent five-year period. Because a county can qualify under either criterion, the list is longer than the “bottom 25”: At present, 31 counties are qualified as distressed. The proposed bill would actually broaden this to cover the bottom 33 counties under either criterion — creating a list of nearly 40 counties.

A “grayfield site” is defined as a property whose “current use is outdated or prevents a better or more efficient use,” and is either partially vacant, has an assessed value that has fallen by 25 percent or more, or is being used as a parking lot. A “brownfield” is defined here as simply a property that is “abandoned, idled, or underutilized” and where “expansion or redevelopment is complicated by real or perceived environmental contamination.”[2] These definitions are alarmingly broad and subjective. Grayfields can be conjured up wherever property owners can imagine “a more efficient use” of an older commercial site. And brownfields need not even involve actual environmental contamination. These designations extend the low wage thresholds well beyond the 40-odd “distressed counties” — indeed it is easy to see “high quality” jobs becoming the exception rather than the rule under the program of that name.

The bottom line here is quite simple. Public revenues should be used to subsidize private investment only when such investment would not have occurred in the absence of the subsidy, and only when the public benefit of such assistance is substantial and tangible. That public benefit is realized by targeting jobs of exceptional quality, or targeting areas of the state that are in exceptional need. When “need” is defined so broadly to include nearly half the state, and then to lower wage standards — neither purpose is served.

[1] Iowa Code 15.327 defines the laborshed wage as “the wage level represented by those wages within two standard deviations from the mean wage within the laborshed area in which the eligible business is located, as calculated by the authority, by rule, using the most current covered wage and employment data available from the department of workforce development for the laborshed area.” See also IEDA wage requirements.
[2] The proposal law does not include, in the “brownfield” designation, sites on the federal (”superfund”) list.

Colin GordonColin Gordon, Ph.D. (History), Professor, Department of History, University of Iowa, is a Senior Research Consultant for the Iowa Policy Project. He has authored or co-authored several IPP reports, including most in the State of Working Iowa series, to advance effective and accountable policies that help working families. Among these are Wage Theft in Iowa, and Not Your Father’s Health Insurance: Discount Medical Plans and the Health Care Crisis.

The Iowa Policy Project is a nonpartisan, nonprofit public policy research organization based in Iowa City. Reports are at IPP is a member of the Economic Analysis Research Network.