AMES, Iowa -- Iowa may not be getting the expected "bang" for its tax credit bucks in terms of stimulating research and development (R&D) opportunities through its Research Activities Credit (RAC) program, according to a new report by economists from Iowa State University's Regional Economics and Community Analysis Program (RECAP).
The report found that while R&D-related payments under the state's RAC program have grown exponentially this decade -- increasing more than 271 percent between 1996 and 2006, or more than 10 times the rate of growth in the state's Gross Domestic Product (GDP) -- there is no evidence that the spending has improved the state's competitive position in terms of overall R&D activity or total state productivity, as measured by GDP. In fact, the ISU economists found that the state performs much worse than would be expected in terms of improving its national competitive position in high tech job growth, levels of R&D activity and high-tech firm start-ups.
Liesl Eathington, an assistant scientist in economics and director of RECAP; and Dave Swenson, an associate scientist in economics, co-authored the report. They conclude that the lack of R&D opportunities within Iowa is contributing significantly to the state's outmigration "brain drain."
"The state's universities produce a surplus of highly trained scientists, engineers and technicians, but the state's overall rate of high technology firm growth, as well as its existing industrial structure, are not sufficient to effectively utilize that talent and it must, therefore, outmigrate to jobs in other states," the researchers wrote.
Shortchanging high-tech jobs
The RECAP economists report that the average annual wage for jobs across all occupations in Iowa was 85 percent of the U.S. average in 2008. They found that a full third of Iowa's high-tech jobs have average compensation levels less than 85 percent of the U.S. average -- considered substandard nationally.
"So Iowa would not be expected to be nationally competitive in these occupations at all," Eathington said.
Only 3 percent of high tech jobs in Iowa have average compensation levels above the U.S. average for occupations in those categories, according to the report.
The ISU economists point out that nationally, two thirds of R&D tax credit claims go to qualifying wages and salaries. But after 20 years of subsidies to R&D, improvements in Iowa's occupational competitiveness are still not evident.
"The growth in RAC claims has been used by industry as evidence of the program's value to the state of Iowa," the researchers wrote. "This research suggests that claim may be something of a red herring."
Eathington and Swenson conclude that the primary value of the RAC in Iowa appears to be its ability to offset corporation income tax payments more so than direct or indirect Iowa economic performance gains or improved national R&D competitiveness.
More reports on key state funding issues
The report is the latest produced by the RECAP staff to provide economic analysis on some important state funding issues.
Swenson, Eathington and RECAP retail economist Meghan O'Brien collaborated with ISU Extension's Community and Economic Development, on "The State of Iowa Housing and Data Analysis." The report was used in November by the Iowa Department of Economic Development to help secure $50 million in new federal housing and community development funds from the U.S. Department of Housing and Urban Development.
And the head of Iowa's Department of Human Services recently made the difficult decision to close one of the state's mental health institutions -- a move meant to cut costs and consolidate care for the declining number of patients who use such state facilities -- with the help of a RECAP report. The "Iowa Mental Health Facility Economic, Fiscal, and Community Impact Analysis" was prepared by Swenson and Eathington for the Division of Mental Health and Disability Services, Iowa Department of Human Services. It looked at the employment at the institutions, indirect jobs and "induced jobs" supported by worker spending.
Swenson reports that RECAP economists are increasingly being contracted to provide economic analysis to assist state agencies in their budgetary decisions.