Peter Orazem would like to determine the real benefits and costs of tax incentives.

The Iowa State University economics professor believes we’d all be better off if we understood which types of tax law changes help the economy and which do not.

He’s been on this quest for more than a decade, long before Apple set off public policy alarms last month by announcing it would receive more than $213 million in local and state subsidies to build a $1.375 billion data center in Waukee.

The Apple deal will be debated repeatedly before Iowa’s 2018 election, despite the fact that neither side will have much in the way of hard evidence.

What Orazem would like to do is create a measurable framework for determining which kinds of tax incentives help the economy and which do not.

He won’t have an answer before the election. But looking at what he is attempting to accomplish, and why he’s doing it, may help the rest of us better understand what’s at stake.

Orazem believes that the best way to determine what works and what does not is to look at changes in marginal tax rates in parallel real-world settings. By that, he means looking at what you and I would call border cities – communities that span two or more state borders, like Council Bluffs and Omaha, or Davenport and Rock Island. 

He got the idea years ago from Art Hall, a colleague at the University of Kansas.

“Art Hall said if you go to Stateline Road in Kansas City, where Kansas is on the west side of the road and Missouri is on the east, all of the physicians live on the Kansas side of Stateline Road,” where property taxes were lower, Orazem said. 

Development of suburban Johnson County, Kan., over the past several decades is tangible evidence of a tax incentive at work, Orazem said, because Johnson County, Kan., is now one of the wealthiest counties in the United States. 

Over the years, he said, officials have created business climate indexes that attempt to measure and explain why some areas of the country perform better than others, but most indexes are just collections of anecdotal information that justify whatever tax law changes the authors favor.

None of the indexes was a good predictor of the future, he said, which is why most no longer exist.

Orazem believes that by looking at the economies of border cities and their different state and local tax structures, over time we should be able to get a better idea of which incentives actually work.

There are, he said, 109 borders between the 48 contiguous states. That means there are 109 locations that are ready-made for comparing the outcomes of tax policy.

“It’s a relatively simple idea,” Orazem said. “The question is: How do you put it into action?”

To start with, he needed consistent databases that are reliably updated regularly for the geographic areas he plans to study.  

After years of review, he believes he’s found four databases that meet his criteria. Those databases record real estate prices, employment, place of residence and the pace of business startups. 

By using those databases to compare growth rates in selected border cities, Orazem believes he can get a better understanding of the actual impact of different tax policies. For example, do higher marginal tax rates produce slower growth or, if properly applied, do they create the public services that encourage more rapid growth?

Hopefully, he said, at some point he may even be able to answer the question of whether there is public benefit in providing millions of dollars of tax subsidies to a company that builds an expensive plant but hires few people.