Finding civic strategies that work

The team of Alan Peters and Peter Fisher, both UI professors of urban and regional planning, has earned a reputation for myth busting. Also for saving communities a great deal of money.

No one knows better than Harvey Siegelman, a state economist with the Iowa Department of Economic Development (IDED). In 1997, IDED and the Iowa Research Council asked Peters and Fisher to create a tool that would calculate the effect of Iowa’s tax structure on business. The goal was to recruit large companies to the state, but officials had encountered obstacles.

"We viewed ourselves as a tax-heavy state," Siegelman says. "It was this kind of self-imposed inferiority complex that really hurt us when we sat down to negotiate. But the University of Iowa study really saved us–it was groundbreaking work that dispelled many prior beliefs we had with regard to Iowa’s lack of competitive presence on the national tax front."

In simple terms, Fisher and Peters found idiosyncrasies in the state’s tax codes that made Iowa appear to be a far more expensive place to do business than it actually is.

"Essentially, we found that though the corporate tax rate is quite high, the overall tax burden for most types of industry is not," Fisher explains. "This is because of the portion of income that is considered taxable. And it is particularly true for large manufacturers, which was one of the major targets for the Iowa Department of Economic Development."

Today, IDED uses the Corporate Tax Comparison Software Program, a computer model designed by Peters and Fisher that crunches the numbers for individual companies and calculates what their actual taxes would be in Iowa; the program also provides comparable data on other states. The best part, Siegelman says, is that in electronic demonstrations, Iowa often wins. And for a man whose mission is wooing businesses and jobs into the state, the program has become an essential, invaluable tool.

Meanwhile Peters, who specializes in economic development and computing, and Fisher, who researches state finance issues and tax policies, discovered they were a perfect professional match. In 1998, they began a three-year project studying the effectiveness of enterprise zones in 13 states–California, Connecticut, Florida, Illinois, Indiana, Kentucky, Missouri, New York, Ohio, Pennsylvania, Texas, Virginia, and Wisconsin.

"An enterprise zone can be defined as a poor inner-city area that needs some sort of economic revitalization," Peters says, "and that is usually delivered through tax incentives to businesses. The idea is that if you attract more companies to enterprise zones, that will create more employment opportunities for the people who live there."

When they began their research, few questioned the validity or efficacy of the practice. In fact, Iowa was just on the cusp of declaring its own enterprise zones and requesting state funding for tax-incentive programs. But Fisher and Peters were skeptical: their data suggested that enterprise zone policies simply didn’t work. For one thing, newly created jobs frequently were filled with people from other areas of the city. Surprisingly, incentives seemed to have very little behavioral effect on people making the decisions about where to locate a business.

Midway through the study, Fisher took a group of Ph.D. students to an urban site where they visited two community development agencies working within a declared enterprise zone and discovered that community leaders were noticing the same lack of results.

"In both cases, I asked the agency directors to tell my students what they were doing to retain businesses and attract new ones," Fisher says. "In neither case did they mention the enterprise zone, and when I asked them straight out, both directors said it simply wasn’t an important factor."

Another factor Fisher noted on the trip, confirmed later by data from all 13 case studies, was that different enterprise zones within a single state often vie with one another to draw the same company. So economic development funds end up being used for intrastate, sometimes even intracity, competition.

During 2000-01, Fisher and Peters summarized their findings: enterprise zones waste resources that could be put to better use. What’s more, they can be replaced with far less expensive and more effective strategies, such as restructuring the tax code and eliminating burdensome laws. In sharing that information with state leaders, the researchers hope to improve success rates for urban neighborhoods around the country. In a book currently being edited for publication by Upjohn, they will go public with their fairly controversial stance.

"The goal is that our research won’t be just academic," Peters says. "We believe there will be people in statehouses and cities all over the country who will use what they find in our book to design better policy."