Google and Tax Competition in Iowa

Today’s BNA Daily Tax Report contains a story reporting on the Iowa Legislature’s enactment of special sales and property tax exemptions for “certain computer equipment”. The report includes a listing of the following requirements for eligibility under the statute:
"· The business of the purchaser or renter must be that of a provider of a web search portal. · The web search portal business must have a physical location in the state that is used for the operation and maintenance of the portal site on the Internet including but not limited to research and development to support capabilities to organize information and to provide Internet access, navigation, and search.
· The web search portal business must make a minimum investment in an Iowa physical location of $200 million within the first six years of operation in Iowa beginning with the date the web search portal business begins site preparation activities.
· The web search portal business shall purchase, option, or lease Iowa land not later than Dec. 31, 2008, for any initial investment." (Source, BNA Daily Tax Report, June 26, 2007).

Though written to sound like a generic incentive provision, few firms are in the web search portal business, and fewer still can invest $200 million. Though the report says nothing about this, it is obvious that this provision was designed for Google. Those who follow local news in this region know that it recently announced the construction of a “server farm” in rural Council Bluffs, Iowa, that will entail a $600 million investment. This story has generated considerable attention in our region, including a little jealousy from those on the Nebraska side of the Missouri river.

Legislation like this may be helpful in competing for business, but it is also troubling in a fundamental way. If investment in computer equipment is good and we wish to incentivize such investment, then why not an exemption for everyone who purchases that equipment? And what is so magical about a “web search portal business” as opposed to other data storage and retrieval operations? Won’t smaller firms, who make these investments to increase their productivity, provide similar benefits to the Iowa economy?

One of the strengths of our federal system is that it allows competition among the states. You don’t get a “one-size-fits-all” approach to government. Sometimes this spurs innovation. Other times, it may effectively result in “bribery” by government. The thing about “bribery” is that you may win sometimes, but you know you can never trust the government who invokes the bribe. Provisions like this one effectively allow other firms (and typically smaller ones) and individuals to bear the costs of government, while the favored one gets a break. But once located there, who is to say that you won’t be the one bearing the burden next time?

Though it is probably a good idea to be mistrustful of government always, I would much prefer to see a more principled focus on competition that seeks to design systems that apply across the board to everyone, with as few exceptions as possible. Keeping the playing field level and well-mowed (i.e., with low rates and limited regulations to entangle the player’s feet, so to speak) will do more, in the long run, to build and attract a vital economic community.

And of course, there are other factors as well. Council Bluffs has succeeded in getting Google, but query: where will the technology workers come from? And where will they choose to live and raise their families? According to data maintained by the Des Moines Register, Council Bluffs Public Schools managed a 68.6 percent high school graduation rate in 2005. That means more than 30 percent of the high school kids in that district are not graduating. (I have seen even lower statistics, but this one is readily available here: http://data.dmregister.com/gradrates/index.php.) I am afraid this is an inconvenient truth that must also be addressed.

EAM