Iowa Economy

Article of the Day

Battle of the Statehouses – Wall Street Journal


Iowa has long been the New Jersey of the Midwest with the nation’s highest corporate rate and a punishing 8.98% top income rate. Republicans this year made the Hawkeye State more competitive by putting the top income tax rate on a path to 6.5% by 2023. Over the next three years, the state’s 12% corporate rate is set to decline to 9.8%—assuming GOP Gov. Kim Reynolds isn’t defeated. Her Democratic opponent Fred Hubbell has warned President Trump’s trade brawls may compel him to hit pause on the tax cuts.

~ Wall Street Journal, Battle of the Statehouses, October 24, 2018

Economic Incentives and Growth

Election day nears and debate about tax policy has some prominence in both federal and state elections, at least in Iowa.

2018 in Iowa saw something I wasn’t sure I would experience, passage of tax reform legislation.  Since the 1990s I’ve had spirited discussions with a variety of elected officials about a tax structure for my home state that puts it at a disadvantage.  A sigh and shrug.  “Taxes are hard.”  So is life, but most of us get out of bed each morning and make a go of it.

Iowa has consistently ranked between 40th and 50th in various tax rankings.  It’s not a fact disconnected from those rankings that the state often ranks in the same place for business startups, venture capital investment, new manufacturing investment, etc.

The 2019 State Business Tax Climate Index from the Tax Foundation produced the data in the Wall Street Journal article.

2019 State Business Tax Climate Index

From the report: In 2018, Iowa legislators adopted a comprehensive tax reform package which will ultimately reduce both individual and corporate income tax rates and eliminate the state’s unusual provision of a deduction for federal income tax payments, subject to revenue availability. These changes are not in effect in 2018, but Iowa’s rankings can be expected to improve as reforms phase in over the next few years.

So movement in the right direction at least!

The White House in September was touting U.S. Census Bureau numbers on new business applications.  When a new business forms, it applied for an employer identification number from the Internal Revenue Service, so this can be tracked in a fairly real-time fashion.

New Business Applications by Quarter 2004 to 2018 United States

New Business Applications by Quarter 2004 to 2018 Iowa

The first quarter of 2018 there were more than 850,000 applications in the United States for EIN’s, the highest number, by FAR, in a long time.  Iowa actually tracked this trend with almost 6,000 applications at the same time, though it fell off from the fourth quarter of 2017 whereas the U.S. continued to shoot up.

How many of these corporations actually end up creating jobs is difficult to forecast early, however.  Some corporations, for example, may be formed as holding companies or ‘shell’ corporations created for tax purposes.  There is nothing wrong with this, but economists are interested in how many end up creating new economic activity, jobs and wealth.

Economists that monitor new business formation have feared for quite a while a long-term drop off in entrepreneurial startup activity.  The Kauffman Foundation, for example, has charted this trend and created constructive conversations about its roots and the implications.

Might we be seeing a return to historic levels of new business formation?  If so, this is good news indeed for economic growth.

The White House naturally enough touted tax and regulatory reform as the basis for growth.  Leaving the political arguments aside, at the heart of this notion is that incentives matter.

Economic growth results when people:

  • Produce/work
  • Save
  • Invest

Disincentives to these three activities will reduce economic growth.  Incentives for these activities will increase economic growth.  There are caveats, for course, but these represent the core drivers of economic growth.

Federal and Iowa tax policy are now set to provide stronger incentives for production, saving and investing.  Improved economic growth, all other things being equal, will be higher.

Of course other things are not always equal.  Trade policy, for example, has created significant disincentives in agriculture for production, saving and investment.

But maybe, just maybe, Iowa can leave behind references from the Wall Street Journal and others as the ‘New Jersey of the Midwest.’

Building an Ecosystem for Agtech Startups

Excerpts from Kevin Kimle’s February 15, 2018 testimony to U.S. the House of Representatives Small Business Subcommittee on Agriculture, Energy, and Trade

Technology is nothing new, of course, whether in agriculture of any other industry.  What may be new is the speed and scale at which technology can shape new opportunities and disrupt existing businesses and industries. Agtech is by all indications important.  There are many accelerator programs related to starting agtech businesses, funding of agtech startups has grown, etc.

Funding for agtech startups has increased significantly.  As tracked by AgFunder News, investment in agtech increased from about $150 million in 2010 to more than $800 million in 2016 and more than $500 million in 2017.  Transactions like Monsanto buying Climate Corp in 2013 for $930 million or in 2017 DuPont Pioneer buying Granular for $300 million certainly got attention of investors, entrepreneurs and agricultural business professionals.

Both Climate and Granular were founded in Silicon Valley, the hub for tech startups and investing. Will there be a Climate or Granular type exit event for an agtech startup from the Heartland? Is there an ecosystem for agtech startups apart from Silicon Valley?

A 2017 report from M25 examined the Midwest and labeled it as the region that will give rise to the next crop of $1 billion-plus companies (Schulman 2017). From where does that observation arise? What’s going on in the Midwest?

Can the Midwest be a Hub for Agtech Entrepreneurship?

The Midwest is home to the greatest concentration of animal protein supply chain activity in the United States and early-stage agricultural technology activity in the Midwest is particularly relevant to these supply chains. For purposes of this paper, the Midwest is comprised of Illinois, Indiana, Iowa, Kansas, Michigan, Minnesota, Missouri, Nebraska, North Dakota, Ohio, South Dakota and Wisconsin.

The Midwest has a strong concentration of public and private entities focused on developing agricultural technology. It is home to land grant public universities that provide a unique network of cutting-edge basic and agricultural science platforms. There is also a concentration of agricultural businesses engaged in technology development at many different levels. The Midwest is a catalyst of US agricultural innovation, knowledge transfer, and entrepreneurship development.

And yet there is much untapped and undeveloped potential for agtech entrepreneurship and investment-related activity.

Examples of geographic clusters of early-stage agricultural technology development in the Midwest include established public and private organizations that shape the environment for technology development, business development and entrepreneur/startup mentoring and support:

  • Des Moines/Ames, Iowa.
    • Multiple plant science agricultural business such as DuPont Pioneer and Stine Seed
    • Iowa State University – land grant public university.
    • Iowa State University Research Park – assistance and accessibility for early stage businesses
    • Iowa State University Agricultural Entrepreneurship Initiative – development program for agricultural entrepreneurs and agricultural innovation
    • Agriculture Startup Engine – investment platform for agtech startup businesses
    • Iowa AgriTech Accelerator – Mentor-driven business accelerator designed to foster innovation in the AgTech industry
    • Cultivation Corridor – Organization aiming to create a global center of excellence in agbioscience, biorenewables, biotech and advanced manufacturing
  • Omaha/Lincoln, Nebraska.
    • Home to agricultural businesses such as Green Plains Energy and Valmont
    • University of Nebraska – land grant public university
    • Nebraska Innovation Campus: support for early stage companies
    • Water for Food Institute – research institute for achieving food security with less pressure on water resources.
    • University of Nebraska Engler Agribusiness Entrepreneurship program – support and encourage entrepreneurship amongst students
  • Louis, Missouri.
    • Monsanto – plant science agricultural business
    • Bio-Research & Development Growth Park – bio-research facilities for emerging scientific enterprises
    • Danforth Plant Science Center – nonprofit scientific facility to increase understanding of plant biology
    • Yield Lab – agtech accelerator with a stated mission to sustainably increase the global food supply and reduce inputs to agricultural production and distribution
  • Twin Cities, Minnesota
    • University of Minnesota – land-grant public university
    • Home to agricultural and food businesses such as Cargill, General Mils, CHS, and Land O’Lakes.
    • Techstars Farm to Fork Accelerator – focused on the tech/digital side of food and agriculture from agtech, manufacturing and supply chains, to food safety, waste reduction and traceability.

Though agtech investing has risen significantly in the U.S. and entrepreneurial activity in the Midwest as evidenced by programs related to agtech has also increased, evidence of significantly higher venture capital funding in the Midwest is limited.

Venture deals in the United States have been most heavily concentrated in Silicon Valley, with up to 50 percent of total VC investment dollars in the country flowing to companies in northern California during some quarters. The Midwest remains underdeveloped relative to other parts of the United States in attracting venture capital funding. While venture capital invested in the Midwest rose from $1.8 billion in 2007 to $4.0 billion in 2017, this represented only 4.7% of the total in the U.S. in 2017, making the Midwest a poor performer in terms of per capita venture capital investing (National Venture Capital Association Data).

Early-stage business activity is difficult to track by its nature. Inventors, entrepreneurs, and investors advance projects without extensive public disclosure, and personal networks are an important means of communication and development. To provide a proxy for the state of early- stage agricultural innovation activity in the Midwest, an analysis was conducted of business plans developed by students at the Agricultural Entrepreneurship Initiative at Iowa State University compared to those tracked by AgFunder in 2016. The dataset offered here is a snapshot of early-stage business development activity, much of it related to agricultural technology.

AgTech Interst by Subsector

This analysis revealed a higher interest by ISU students in production agriculture oriented technologies than those tracked by AgFunder. Areas of activity such as animal health and management, decision support technologies, food science, energy efficiency, feed efficiency, sustainable production systems, environmental mitigation and manure management are more focused on the agricultural activities present in the Midwest.

Ecosystem Opportunities and Challenges

The common metaphor for fostering entrepreneurship as an economic development strategy is “ecosystem.” But what makes an ecosystem vibrant for entrepreneurial activity?

A Harvard Business Review article provided a true/false quiz on the topic (Isenberg 2014).

You know that you have a strong entrepreneurship ecosystem when there are more and more startups. FALSE

Offering financial incentives (e.g. angel investment tax credits) for early stage, risky investments in entrepreneurs clearly stimulates the entrepreneurship ecosystem. FALSE

In order to strengthen your regional entrepreneurship ecosystem, it is necessary to establish co-working spaces, incubators and the like. FALSE

According to entrepreneurs the top three challenges everywhere are access to talent, excessive bureaucracy, and scarce early stage capital. TRUE

Wanting a vibrant entrepreneurial ecosystem for agtech entrepreneurs in the Midwest and actually having one are different.

Specific challenges include the following.

  • Funding – The right money at the right time for each startup business is always a challenge. The good news is that there are many more sources for early-stage funds than 20 years ago. The popularity of shows such as Shark Tank has led to a proliferation of competitions that often have financial prizes, and is a cultural phenomenon that shouldn’t be discounted. There are pitch and business plan competitions, incubation and accelerator programs, a greater array of local and regional funds today than ever before.
  • Mentoring – Most startup success stories will also have stories about key mentors that provided key advice and perspective at key times.  Entrepreneurs break rules and make mistakes in an effort to drive their businesses forward. As with funding, mentoring programs are now much more common than 20 years ago. However, the most valuable mentors for entrepreneurs are entrepreneurs, and those can be difficult to find depending on where you live. For entrepreneurs working to build high-growth businesses, the best advice will come from those who have built their own high-growth businesses. But the number of individuals who have ‘done it’ is not high, especially in a region with lower population density.
  • Change-making culture – An element of support for entrepreneurs is cultural. A culture that is accepting of the risks and contrarian nature of new ideas is important. The friendly and egalitarian culture of the Midwest may at times be at odds with widespread celebration of entrepreneurial rule-breaking and risk-taking. There is an old saying in the Midwest that’s indicative of a culture that, at times, may not be conducive to entrepreneurs: “Nothing is punished in a small town like success.”
  • Agglomeration – Economists view agglomeration as an issue important in economic development in that firms and professionals from an industry are often located near to each other. This concept relates to the idea of economies of scale and network effects. As more firms in related fields of business cluster together, their costs of production may decline significantly (firms have competing multiple suppliers; bigger talent pool; greater specialization and division of labor result). Cities form and grow to exploit economies of agglomeration. But what about the Midwest and agriculture? By it’s nature, agriculture is spread out. The biggest concentration of agricultural production in the U.S. is in the middle of the continent while the highest populations densities are on the coasts. While it’s a good thing that cities and agriculture don’t on a large scale compete for land in the U.S., it also means that agricultural professionals and entrepreneurs don’t have the agglomeration affects of something like the tech industry in the Bay area of California.

On the other side of each of these challenges lie opportunities. Agtech investing and the popularization of it as a sector unto itself now results in websites, funds, conferences and other events that enable coordination, new relationships and other positive spillover affects.

For the agtech ecosystem in the Midwest to continue to become more vibrant three things are critical.

  1. Expose more young people to the concept that entrepreneurship is an option – Whether university programs or even high school programs, young people will benefit from being exposed to entrepreneurship. Fewer young people today grow up in families with farms and small businesses, so we need them to meet entrepreneurs and small business owners and have experiences that expose them to the idea that they can not only someday get a job, but also make a job.
  2. Continue to develop more forms of early-stage funding – The more sources of funding for early-stage startups, the richer array of startup businesses that will emerge. Competitive filters on funding, whether a pitch competition or review panels for government programs, are important not only to insure the best ideas rise to the top but also to institutionalize feedback loops. The more sources of early feedback for aspiring entrepreneurs, both positive and negative, the better off they will be.
  3. More Midwestern funds – The development of more professional funds in the region, whether angel, seed, venture, private equity, or whatever will benefit the region. Investors from one region and entrepreneurs from another can work sometimes, of course, but location matters. If there are more funds in the Midwest, there will be more investing in the Midwest.

Rural Vitality

Are there implications of agtech development for the economies in rural areas?

The adoption of agtech will result in a more productive and sustainable agriculture. The process of farm to fork will be more automated, connected, sensed, and traced. The ability to do and create new products, services and experiences will create opportunities that can work anywhere, including rural areas.

Will there be agtech startup businesses in rural areas? Yes. Agglomeration affects will still favor more urban environments for many agtech firms, but smaller towns that support entrepreneurs will result in startup activity. As one example, the Startup Factory program at Iowa State University has started to work with rural communities on running parallel programs for entrepreneurs in Ames and in those communities.

The most significant impact of entrepreneurs on rural economies, however, will come from Main Street businesses.   The entrepreneurs with high growth agtech businesses to have emerged from programs at the Iowa State University Agricultural Entrepreneurship Initiative are to be commended. But a much higher rate of new business formation and employment has come from the many alumni who have started a new livestock operation, crop farm, vegetable farm, seed business, trenching business, crop input supply business, etc. And many or most of these businesses are in rural areas. We estimate that twenty times more alumni have started these types of farms and businesses than have started higher risk/higher reward businesses.

A 2008 survey of Iowa State University alumni from 1982 to 2006 found that 15.8 percent had started at least one for-profit business (Jolly, Yu, Orazem, Kimle 2010). These businesses resulted in creation of 222,569 jobs. These companies had 2007 revenues of approximately $64 billion. For an indication of magnitude, note that Iowa gross domestic product was $135.7 billion in 2008.

Of the 222,569 jobs created at the businesses started by ISU alumni entrepreneurs, only 35,242 of those were created in the state of Iowa, 15.8 percent of the total. A higher proportion of total companies founded by alumni were located in Iowa (35 percent), but those businesses located outside Iowa had more jobs created per enterprise. Large metropolitan areas both in the Midwest (Minneapolis, Chicago, St. Louis, Kansas City) and outside the Midwest (Phoenix, Los Angeles, Dallas, Seattle, San Francisco) recorded multiple alumni starting businesses. A alumni base that was greater than 75 percent from the state of Iowa created 84 percent of jobs outside the state of Iowa.

There are likely multiple explanations for this. The top response for business location in the survey was ‘where I lived’ (82 percent ranking it as very important) indicating that alumni had already moved away from Iowa to pursue their careers when they started their entrepreneurial ventures. Rather than move back to their native state of Iowa, they located their business where they lived currently and had built their post-undergraduate career and lives. The first business start for alumni was on average 10 years after graduation.

The founding of entrepreneurial ventures by ISU alumni outside the state of Iowa may signify the ‘brain drain’ problem long cited in the Midwest. But the graduation period for this survey group, 1982 to 2006, had an extended period of economic distress in agriculture and other Iowa industries. Job opportunities for ISU graduates were outside of the state and even region and they settled and started their businesses elsewhere.

Will a future survey of 2007 to 2031 graduates show similar results? Preliminary indications are that no, a higher proportion of entrepreneurial activity will occur in Iowa and the Midwest. Certainly the attractiveness of a career in agriculture in 2018 compared to 1988 is higher based on enrollment at Colleges of Agriculture at Iowa State University and other universities also. More young people seeking careers in agriculture is likely positive for rural areas. 66.6 percent of 2015/16 ISU College of Agriculture and Life Sciences graduates, for example, accepted their first jobs in the state of Iowa.

More programs, competitions, and cultural celebrations of entrepreneurship are also positive for the economies of rural areas.

Shark tanks can work anywhere.



Isenberg, Daniel. “What an Entrepreneurship Ecosystem Actually Is.” Harvard Business Review. May 12, 2014.

Jolly, Robert W., Li Yu, Peter F. Orazem, and Kevin Kimle. “Entrepreneurship and higher education: an overview of the Iowa State University alumni survey.” (2010).

Schulman, Katherine. “Agtech in the Midwest: Creating Fertile ground For the Next Unicorn.” M25 Group. 2017.

Article of the Day

The Future of Agriculture – Economist


The seafood counter historically is the only place in the grocery store where we have been hunting and gathering, and that is rapidly changing to a farmed environment. And with the interest in local and domestic production, sustainability, and carbon footprint, the emphasis is now on producing more seafood here in the U.S.
~ Joe Hankins –  Director, Freshwater Institute

Six Reasons Salmon Production in Iowa is Interesting

I am part of a startup business, Inland Sea, that in September publicized for the first time an intention to build a recirculating aquaculture system facility to produce salmon in Iowa, specifically a site in Harlan.  With a two-acre footprint, this large-scale, bio-secure and efficient facility will result in weekly harvest of approximately 100,000 pounds of salmon, 5.3 million pounds annually.

ras-tank-renderingRendering of Salmon Production Tank ~150 feet in Diameter

We believe indoor fish production is the emerging frontier of aquaculture and the most promising systems to emerge for indoor, efficient production are recirculating aquaculture systems (RAS), and it’s been interesting for the last month to get a deeper sense of other people’s thinking on the topic.  As we’ve conducted a series of public meetings about the Inland Sea-Harlan project, a sense of people’s interest in the project has emerged based on the questions they ask.

A common question to the Inland Sea team, however, is why we became interested in this opportunity.  The top six include the following.

  1. The technology model has been proven elsewhere – Multiple RAS salmon production facilities are currently operational in Europe. These European RASs have demonstrated capability as environmentally sustainable and scalable, with the ability to guarantee both the safety and the quality of the fish produced.
  2. Competitive unit economics – The economics of aquaculture starts with feed conversion. One advantage fish have over land animals is feed conversion. Fish need fewer calories, because they’re cold-blooded and due to living in a buoyant environment, they don’t fight gravity as much. It takes roughly a pound of feed to produce a pound of farmed fish; it takes almost two pounds of feed to produce a pound of chicken, about three for a pound of pork, and about seven for a pound of beef. The salmon produced in a model facility in Denmark has demonstrated a feed conversion ratio of approximately 1.10.
  3. Salmon consumption has upside potential – U.S. salmon demand grew rapidly in the 1990s, and has been relatively flat since because of higher prices and constrained supplies. Salmon passed tuna as the second highest consumed seafood in the U.S. in 2013, coming in at 2.7 pounds per capita compared to 3.6 pounds for shrimp and 2.3 pounds for tuna. In addition, salmon is the only seafood consumed primarily as a premium product rather than frozen or canned.  A one pound uptick per capital in U.S. salmon consumption would require about 60 Harlan facilities worth of production to fill.
  4. The next model of salmon production – Due to biological constraints, seawater temperature requirements and other natural constraints, seaside farmed salmon is primarily produced in Norway, Chile, UK, North America, Faroe Islands, Ireland, and New Zealand/ Tasmania. Seaside salmon aquaculture production has reached a level where biological boundaries are being pushed. The Chilean industry, for example, has had significant struggles with disease, sea lice, and algal blooms in recent years. In addition, seaside salmon aquaculture production can occur only in a few areas globally because of water temperature and there is little upside production potential remaining. Future production growth of any significance will need to come from RAS systems.
  5. A fantastic food – A good aim for a food business is to make a fantastic product, and salmon from RAS production fits the bill with great texture, taste and nutrition profile.  And, of course, fresher is better.  Salmon has been termed by nutritionists as a superfood for its health impact. It is one of the best sources of omega-3 fatty acids, particularly EPA and DHA, which are nature’s heart medicines.
  6. Iowa and aquaculture are a fit – The major input for salmon, like any animal protein, is feed. Iowa is one of the lowest cost feed ingredient locations in the world. Another major input for RAS salmon is electricity, and Iowa has one of the lowest kWh prices in the nation. Finally, the salmon you eat in the Midwest travels approximately 4,000 miles from Norway or approximately 5,500 miles from Chile. We anticipate that salmon production in Iowa will have an out-of-the gate transportation cost advantage of approximately $0.50 to $1.00, aside from a freshness advantage.

We know other agricultural entrepreneurs working on aquaculture projects, driven by similar reasons to ours at Inland Sea.  But what other opportunities may be driven by one or more reasons similar to the above?  What opportunities are there for other proteins?  How might technologies deployed in RAS systems (sensors, water treatment, precision feeding, biological controls) be deployed for agricultural production beyond fish?  What opportunities for entrepreneur may emerge as new industries emerge in new areas?

Value Added Agriculture and the Terroir of Innovation

The annual produce of the land and labour of any nation can be increased in its value by no other means, but by increasing either the number of its productive labourers, or the productive powers of those labourers who had before been employed.
~ Adam Smith, The Wealth of Nations, Book II, Chapter III.

The Des Moines Register published an article that the value of Iowa’s crops and livestock sales would reach something close to $30 billion this year, triple the value of ten years ago.

A big part of this change is driven by dramatically higher commodity prices.  Most or all of this year’s corn crop will be sold for more than $5 per bushel, for example, whereas the average price received by farmers in 2000 was $1.90 per bushel.

There also has been an increase in the productive capacity of grains and livestock in the last ten years.  Yields, of course, fluctuate from year to year, but they trend upward.  Average yield for corn in Iowa in 2000 was 145 bushels/acre and is projected to be 167 in 2011, for example.  In 2009, a better growing year, corn yields averaged 182 bushels/acre.

Productivity can increase in other ways to increase the value of crops and livestock.  It’s the application of innovation that sparks my entrepreneurial interest in particular.  An example is La Quercia, a company in Norwalk that sold its first aged, prosciutto-style ham in 2005.  Now it sells tens of thousands of them, along with other associated pork products, throughout the U.S.

I was visiting the Santa Clara Valley wine region in California two years ago, when I met a local gentleman who asked where I was from.  I told him I was from Iowa.  He smiled.   “Iowa,” he said.  “There’s  a company there that makes the best prosciutto.”

“La Quercia,” I replied.  “A guy I used to work with started the company.  I like it too.”

I can’t say I’ve had anyone from either coast say anything much more pleasant about where I live.  Iowa, the land of great prosciutto!

La Quercia is run by Herb and Kathy Eckhouse.  I met Herb in the 1990s when we both worked for Pioneer Hi-Bred International, the global seed company.  The Eckhouses had lived for three years in the 1980s in the Italian city of Parma before moving back to Des Moines.  They had picked up a taste for all things Italian and Herb started to experiment with aging hams.

La Quercia has moved well beyond experimentation.  The company’s headquarters is a 50,000 square foot facility.  A big part of that space is occupied by state-of-the-art refrigeration units.  These units are set up to mimic the seasons in terms of temperature, humidity and air movement, and replicate the ancient process of curing hams.

La Quercia’s hams are sweet and on the low end of saltiness for cured meats, with a delicacy that is touted by chefs, food critics, and food publications.  In 2007, as sales of La Quercia products really accelerated, Bon Appetit magazine, a premier food publication, awarded the company its Food Artisan of the Year award.  Feature articles on the company have appeared in the New York Times, the LA Times, Cooks Illustrated, Serious Eats, Chicago Magazine, Saveur, the Chicago Tribune, Edible Communities, and The Art of Eating.

La Quercia’s artisan pork is produced using dry curing based on traditional Italian methods. This is a millennia-old method that involves salting and drying to preserve meat and then aging to develop flavor internally.  No nitrates, nitrites or their vegetable-derived substitutes are used in curing.  A maximum of three ingredients are used, pork, sea salt and spices, depending upon the product.

With the exception of a small quantity of pork that comes from pigs fed acorns (for a nutty meat flavor), most of the pork purchased by the company is fed a fairly standard ration of corn and soybean meal.  The Eckhouses have explained to me that they want their products to reflect Iowa’s terroir, and that includes corn and soybeans.

Their focus on a high-quality, high-end product adds value that makes other pork and ham products pale in comparison.  The company’s Prosciutto Americano will sell at retail for around $40 per pound.  Other, higher-end prosciutto made from organic and acorn-fed pigs may retail for more than $200 per pound.

Iowa’s agricultural landscape will continue to be represented by those engaged in creation of products on the lower end of the cost scale.  However, La Quercia is an example of how to apply innovation to a specialty market segment and in the process create new value for corn, soybeans, and pork produced in Iowa.

America is a land of taxation that was founded to avoid taxation.
– Laurence J. Peter

In the previous post I wrote about a survey that found that Iowa State University alumni entrepreneurs disproportionately started their companies in places other than Iowa.  While there are a number of reason for this, it seems likely that the business climate in Iowa, or lack thereof, must play some role.

But how do we measure business climate?  How do we gauge how friendly or unfriendly the environment in one state is for starting and operating a business versus another?  One method is to look at taxes.

My colleague Peter Orazem and former graduate student Joe McPhail have worked on a very interesting means of sizing up the business climates of states, and are in the process of updating their data.

This paper analyzes tax policies across states, with particular emphasis on marginal tax rates, or the tax rate that applies to the last dollar of the tax base (taxable income or spending).  Marginal tax rate is a term often applied to the change in one’s tax obligation as income rises.

The paper finds that there are persistent differences in distortionary tax policies across states which have caused persistent differences in capital investment across states.  There is evidence that there are low levels of labor productivity in states with the most distortionary policies compared to states with more favorable tax policies.  Iowa’s taxation ranks most negative among the 48 states, dead last,  in the analysis for its impact on labor productivity, and thus its impact on income, employment, and investment.

Taxes on property, corporate profits and consumption are the most damaging to labor productivity. Jointly administered income and capital gains taxes have smaller but still significant effects. Corporate taxes are particularly inefficient because they generate relatively little tax revenue per unit of lost productivity.

The overall effect of marginal tax rates on output per worker are substantial, reducing state labor productivity an average of 19.4%. They are responsible for substantial differences in the level of labor productivity across states: from a minimum negative impact of 11.8% in Nevada to a maximum of 27.6% in Iowa. States that rely more heavily on distortionary tax levies discourage capital investment, leading to lower levels of labor productivity and wages.

There are large and persistent differences in state tax policies as state taxes simply don’t change much over time.   The authors show that in theory, taxes on capital income, capital ownership, and sales will all lower labor productivity by distorting prices and returns to investment.  As implemented by the states, property taxes are responsible for 35% of the lost labor productivity while corporate taxes and sales and excise taxes are each responsible for 25% of the adverse effect. Income taxes and capital gains taxes have smaller negative effects, but as they are imposed together, their joint effects are also statistically significant and economically relevant.

The joint effects of tax policies are substantial, lowering labor productivity by an average of nearly 20% over the period 1977-2004. Tax policies have become more damaging to labor productivity over time, from -13.7% in 1977 to -24.5% in 2004.

Driving the negative effect is the reliance on rising marginal tax rates, apparently because of their greater distortionary effects on prices and returns compared to flatter tax rate structures. Tax policies can lead to substantial differences in equilibrium labor productivities across states, creating a gap of nearly 16 percentage points in output per worker between the least distortionary tax mix (Nevada: -11.8%) and the most distortionary (Iowa: -27.6%). Even though taxes differ in their relative efficiencies in generating revenue, with corporate taxes being the most costly and sales taxes the least costly in lost labor productivity per proportional increase in revenue, it is the highest marginal tax rate and not the type of tax that proves the most important for lost state labor productivity.

From an Iowa perspective, there are several observations:

  • While Iowa taxes don’t appear uncompetitive versus other states looking at individual rates, the net effect of their impact is significant because of their marginal effect, or impact on the last dollar of taxable income or consumption.  In effect, Iowa has the nation’s highest marginal impact on success (income, investment) which negatively affects wages, investment, and employment.
  • The impact of Iowa’s many tax credits and exemptions is to increase marginal tax rates.  A simplified tax regime with a broader tax base decreases this marginal impact and distortionary incentives to realize income, invest capital, and create jobs in other states.
  • State tax policy is relatively stable over the course of time.  One implication is that significant changes in state tax policies are apparently difficult to make.  The other is that if a state like Iowa can improve its competitive tax impact relative to other states, the improvement will likely persist over time.

Taxes are necessary to fund government services, but the structure of those taxes makes a significant difference in terms of the climate for investment and production.  Taxes matter.

Our real objective is not just jobs but productive jobs–jobs that will mean more goods and services to consume.
— Milton Friedman (Free to Choose: A Personal Statement)

In the previous post, I cited the results of a survey of 1982 to 2006 graduates of Iowa State University.  The 15.8 percent of Iowa State University graduates between 1982 and 2006 who had created at least one for-profit business, resulted in the creation of 222,569 jobs.  These companies had 2007 revenues of approximately $64 billion.  For an indication of magnitude, note that Iowa gross domestic product was $135.7 billion in 2008.

An interesting result of the survey was that 84 percent of these over 200,000 jobs were created outside the state of Iowa.  Only 35,242 of the jobs created at firms started by ISU alumni entrepreneurs were created in the state of Iowa, 15.8 percent of the total.  A higher proportion of total companies founded by alumni were located in Iowa (35 percent), but those businesses located outside Iowa had more jobs created per enterprise.  Large metropolitan areas both in the Midwest (Minneapolis, Chicago, and St. Louis, Kansas City) and outside the Midwest (Phoenix, Los Angeles, Dallas, Seattle, San Francisco) recorded multiple alumni starting businesses.

If ISU alumni entrepreneurs had started their firms in Iowa and all the jobs created at those firms were also in the state, then theoretically Iowa’s economy would be about 40 percent bigger than it is today.  Can you imagine an Iowa with that many more firms, jobs, and people?

So what’s going on?  Undergraduate enrollment at Iowa State is comprised historically of greater than 70 percent Iowa residents.  It seems reasonable to expect some propensity for an entrepreneur to locate their business in their state of residency and undergraduate attendance.  However, that expectation isn’t met by the data from the survey.

It’s not that I believe that ISU alumni have a particular requirement to start their firms in Iowa, even if they grew up in the state.  We just need to trade some of our native entrepreneurs for those from other states.  I immigrated all the way from Nebraska and have started two companies in Iowa, but apparently this is rare behavior.

Part of the story is the overall environment for entrepreneurs in Iowa.  Iowa’s report card for entrepreneurship is not stellar, with the state consistently ranking between fortieth and fiftieth in most measures of entrepreneurial activity such as venture capital investment, manufacturing investment, employment growth, and new business creation.  This fact makes the entrepreneurial activity of Iowa State University alumni appear all the more impressive.  It may also explain the disproportionate amount of entrepreneurial activity of alumni outside the state of Iowa.

There were some important indicators from the survey on firm location.  The top response for business location in the survey was ‘where I lived’ (82 percent ranking it as very important) indicating that alumni had already moved away from Iowa to pursue their careers when they started their entrepreneurial ventures.  Rather than move back to their native state of Iowa, they located their business where they lived currently and had built their post-undergraduate career and lives.  The first business start for alumni was on average ten years after graduation.

The founding of entrepreneurial ventures by ISU alumni, over 70 percent of whom are Iowa natives, outside the state of Iowa likely signifies problems in the business climate in the state.  A more dynamic business climate would lead to a higher proportion of undergraduates pursuing careers in their native state because of more numerous and better quality job opportunities.  This, in and of itself, would increase the likelihood of alumni ventures being started in Iowa.

The consequences of what is commonly referred to as ‘brain drain’ are profound from an entrepreneurial as well as an economic perspective.  Policies that have focused on keeping students in state to attend college miss the point that if they do not find a commensurate way to make a living in the state upon graduating they will leave (Artz, Georgeanne M. and Li Yu, 2009).

A more dynamic entrepreneurial ecosystem in the state would encourage more alumni to either start their ventures in Iowa sooner after graduation or to move back from another state after having pursued employment with another company for a time.  It would also attract more entrepreneurs who are non-Iowa natives.

The ISU alumni survey reveals the economic impact of alumni entrepreneurs and the positive role that higher education plays in spurring entrepreneurship.  Entrepreneurs tend to have higher incomes, their ventures create jobs for others, and they are more active in their local communities.   This activity does not occur in a vacuum, however, and the business and entrepreneurial climate in the state plays an important role in the form and location of alumni’s entrepreneurial ventures.

Research- and technology-intensive universities like Iowa State can have a dramatic impact on the economy via the entrepreneurial activities of its alumni.  The economic activity this entrepreneurship can spur is part of a larger entrepreneurial ecosystem, however, that necessarily requires a vibrant economic environment to fully extend its potential impact.

In the next post, I’ll dive deeper into issues regarding Iowa’s business climate, as well as that of other states.

Artz, Georgeanne M. and Li Yu.  How ya gonna keep ‘em down on the farm: Which Land Grant graduates live in rural areas? Working Paper No. 09016. Iowa State University Economics Department. July 2009.