SSTI Digest

Two weeks ago, Idaho Gov. C.L. “Butch” Otter vetoed legislation to repeal state R&D income tax credits for Idaho companies. Among his reasons for the veto, Gov. Otter claimed removing the credits would put Idaho at a competitive disadvantage because surrounding states over similar incentives. Was he right?

Legislators in Alaska, Iowa and Oklahoma recently approved funding for several TBED-related initiatives within state operating and capital budgets for the upcoming fiscal year.

Publisher's Note: SSTI notes with much sadness the March 5 passing of Indiana State Sen. David Ford, following a battle with pancreatic cancer. David was a good friend not only of SSTI's, but also of the tech-based economic development community across the nation. In addition to being a tireless and cheerful advocate for investing in science and technology, he was also a gentleman in the true sense of the word, and we miss him greatly.

In recent years, Iowa, like many midwestern states, has experienced a boom in ethanol production. Iowa's natural competitive advantage in growing and processing corn has helped it to move to the forefront of the emerging biofuels industry. The state provides numerous incentives and assistance programs through its Department of Natural Resources to help spur the creation of ethanol-related companies and jobs. A new report by Iowa State University economist David Swenson, however, argues that even if these programs are successful at building a strong ethanol industry, the overall economic impact of this success would be smaller than predicted.

 

Swenson argues in The Economic Impact of Ethanol Production in Iowa that many projections of the economic impact of corn ethanol suffer from improper input-output modeling and frequently overestimate the number of jobs that could be created by the industry. He found that the ethanol boom that occurred between 2000 and 2005 did not lead to the creation of many construction jobs. Instead, much of that construction work was undertaken by out-of-state firms that brought specialized workers with them.

 

Once an ethanol plant is finished, it rarely requires many workers. A 50 million-gallons-per-year (MGY) ethanol plant requires only 35 direct workers, while the more intensive 100 MGY plants still only require 46 employees. In addition, the number of full-time employees required for these plants is expected to decline as the technology becomes more advanced.

 

Some of the other most frequent errors made in modeling the impact of ethanol pointed out by Swenson include:

With the rapidly rising cost of health insurance, entrepreneurs frequently find themselves unable to pay their premium in the early stages of business ownership. Often, this means going without health insurance or abandoning plans to launch a new firm. The North Central Iowa Alliance (NCIA) has announced a new initiative to lower this barrier facing new business owners. The Helping Entrepreneurs Launch Program at North Central Iowa (HELP @ NCI) will make health insurance available to qualified entrepreneurs in the region during the first three years of their business' existence.

 

The program will be launched in partnership with the North Iowa Area Community College John Pappajohn Entrepreneurial Center, which will offer a regional feeder system for HELP @ NCI along with its other services for entrepreneurs. Though the program is offered at no cost to participants, business owners will be made aware of the expenses so that they can incorporate health insurance into the business planning.

 

HELP @ NCI will be funded through a $50,000 grant from the Iowa Department of Economic Development and through $15,000 in matching funds raised by NCIA. The alliance expects this funding to provide assistance for 12 or more new business owners per year, at a monthly cost of $350. Entrepreneurs will be able to apply for the programs though local economic development organizations and the North Iowa Area Community College.

 

A survey conducted in 2006 by the National Association for the Self-Employed found that 57 percent of micro-business owners have had to do without health care coverage at some point. Most of those respondents cited cost as their primary reason for not having insurance. An earlier survey revealed that the burden of health care costs can be much higher for entrepreneurs and small businesses. In 2005, small firms spent nearly 20 percent of the gross sales on heath care, while companies with an annual revenue over $500,000 spent only 2.3 percent. The Kaiser Family Foundation reports that insurance premiums for small companies rose an average of 8.8 percent last year, while larger companies with 200 or more employees saw an increase of only 7 percent.



A separate study published last year by Dr. Tami Gurly-Calvez of the U.S. Small Business Administration's Office of Advocacy, entitled Health Insurance Deductibility and Entrepreneurial Survival, reported that the federal income tax health insurance premium deduction for the self-employed played a significant role in improving an entrepreneur's odds of success. This is particularly true for married entrepreneurs. Dr. Gurly-Calvez found that the presence of any deduction for health insurance costs reduced the probability of an exit by more than 10 percent for single filers and by almost 65 percent for married filers. Somewhat surprisingly, the study also reported that larger deductions did more to decrease the exit rate for single entrepreneurs than for married entrepreneurs.

 

Read the press release from the North Central Iowa Alliance at: http://www.northcentraliowa.net/docs/HELP%20press%20release.pdf

Randy Weiss will serve as an entrepreneur-in-residence within the University of Iowa Research Foundation.

Gary Carter is stepping down as the executive director of the Tax Increment Financing Commission in Kansas City to become a senior vice president of Davenport One, a regional economic development agency in Davenport, Iowa.

Curtis Brown announced that he will resign as executive director of the Mason City Economic Development Corp., effective July 11, to become the economic development coordinator for the City of Ankeny, Iowa.

The 2007 Iowa state legislative session has looked very favorably on TBED. One of the centerpieces of Iowa Gov. Chet Culver’s campaign last year was his pledge to "develop the next-generation energy ecomony in Iowa" through a $100 million state fund (see the Feb. 19, 2007 issue of the SSTI Weekly Digest). The Iowa Power Fund was approved by the state’s General Assembly late last month and closely resembles Gov. Culver’s original plan. For the first year, the fund will be capitalized with an initial $25 million from the state and an additional $25 million annually over the next three years.

 

The authorizing legislation also calls for the creation of a board to oversee the distribution of the funds and a new Office of Energy Independence. The board is authorized to make grants and loans that will accelerate in-state R&D and knowledge transfer and will improve the economic competitiveness of the state’s renewable energy industry. Iowa’s Office of Energy Independence will coordinate all state efforts to promote the use of renewable energy sources and to lead the development of a strong biofuels industry.

 

The General Assembly also approved a Targeted Industries Development Fund to be overseen by Iowa’s Department of Economic Development. The $3 million fund will support several new programs that will promote the commercialization of new technologies in the advanced manufacturing, bioscience and information technology industries. Businesses within these industries will be eligible to receive financial and technical assistance for commercialization projects, training for jobs that require advanced skills, and an internship program for Iowa college students.

 

In late February, Gov. Culver signed SF 162, an act that lifted the state’s five-year ban on the cloning of human embryos for stem cell research. Culver expects the bill to encourage biomedical research at the Iowa’s universities. The legislation is available at: http://coolice.legis.state.ia.us/Cool-ICE/default.asp?Category=BillInfo&Service=Billbook&ga=82&hbill=SF162

Gov. Chet Culver has appointed Mike Tramontina as director of the Iowa Department of Economic Development.

Incentive packages to attract companies are nothing new in economic development. In recent years, though, incentives have been used to recruit technology companies, and these incentive packages are growing in scope and complexity, with some in the hundreds of millions of dollars. Two recent reports that take a close look at experiences in North Carolina and Iowa may be of interest to communities and states using incentive packages to recruit companies to their area.

 

North Carolina

In 2004, Dell accepted an incentive package to build a computer assembly plant in North Carolina. With the state’s contribution over a 15-year period valued at $242 million, plus an additional $40 million provided by its counties, the North Carolina Department of Commerce argued the package was reasonable because the investments would stimulate 8,086 jobs. Researchers at the North Carolina Budget and Tax Center and the Corporation for Enterprise Development analyzed the incentive package, however, noting differences between North Carolina’s offer and Virginia’s $37 million offer for the same project. Virginia believed its project would yield 4,113 jobs while North Carolina’s investment would nearly double this number, they found.



In their report, Getting Our Money’s Worth? An Evaluation of the Economic Model Used for Awarding State Business Subsidies, the researchers conclude that North Carolina's offer to Dell was overly generous, with fiscal impacts three times higher than those of other projections. The researchers attribute the high fiscal impacts to weaknesses in the model North Carolina used to make its projections and a reliance upon excessive sales estimates provided by Dell. Following corrections to the model, the report estimates North Carolina will lose $72 million in revenue from the deal rather than gain $707 million, as the state predicted. The researchers suggest similar generous offers may be widespread, noting preliminary findings of 31 other projects in the state’s Job Development Investment Grants program.

 

While the researchers caution that no projections are 100 percent correct, including their own, they provide recommendations to improve future practices, including:

Mike Blouin has stepped down as director of the Iowa Department of Economic Development to become president of the Greater Dubuque Development Corp..