A new Economic Commentary [PDF] by the Midwest Economic Policy Institute demonstrates how school construction and water quality improvements are both vital to Iowa’s economy.

Investments in school construction allow students to learn in a positive environment, which can improve educational outcomes over the long run. Investments in water quality projects improve health outcomes for Iowa citizens, which can lower healthcare costs over the long run. 

Iowa Governor Branstad has proposed an extension of Iowa’s 6 percent sales tax, which is scheduled to decrease to 5 percent on December 21, 2029, for an additional 20 years until December 2049. Enacted in 2008, the increase in the state’s sales tax from 5 percent to 6 percent now generates more than $400 million in annual revenue for school infrastructure needs across Iowa. The governor’s proposal would extend the 1 percentage-point increase in the sales tax, but would reallocate funds. Schools would continue to receive a baseline amount of revenue, but a portion of the tax collections would go to support water quality and related initiatives. 

Instead of diverting revenue from one construction sector to another, funding both investments would grow the economy and boost employment. Iowa has present-day water quality needs that must be addressed. Appropriate action today could be sustained beyond 2029, avoiding the need for Governor Branstad’s plan to divert school construction funding to water quality projects.

However, if Iowa must choose between school construction and water quality projects, it becomes a matter of preference and of need, based on which sector has quality deteriorating at a faster pace:

• The average blue-collar construction worker on school construction projects in Iowa adds $113,295 in value to the state’s economy over one year and earns a middle-class compensation package totaling $27.04 per hour in wages and benefits. Every $10 million invested in school construction generates 47.4 direct construction jobs and $17.7 million in economic output.
• The average blue-collar construction worker in water quality projects in Iowa adds $114,799 in value to the state’s economy over one year and earns a middle-class compensation package totaling $30.63 per hour in wages and benefits. Every $10 million invested in clean water projects generates 46.8 direct construction jobs and $19.5 million in economic output.

The payoff from each of these investments is greater than benefits associated with many other government expenditures. Every $10 million invested in all other non-education state government programs only generates a $13.0 million increase in economic output.

Iowa Governor Branstad’s proposal would be expected to improve the economy by 18 cents per reapportioned dollar. However, it would be better to reallocate funds from other state government programs, especially since water quality is a present issue and the Governor’s proposal would not take effect until 2029. Diverting revenue from other non-education state government programs to water and sewage projects generates a 65-cent economic gain per reapportioned dollar.

The fairest and most effective way to increase revenue for current water needs is to utilize the taxing authority of drainage districts to charge those who impact the water quality for their usage and pollution. Because spending is higher in cities and suburban areas, residents of populated areas would pay for a disproportionate amount of the water quality efforts through the Governor’s sales tax diversion. Larger cities, besides Des Moines, are not directly impacted by water quality issues associated with agricultural runoff. Whereas the sales tax increase to pay for schools benefits urban and rural populations relatively equally, the shift to funding water quality projects would disproportionately benefit rural communities at the expense of urban consumers.

Iowa’s possible courses of action, ranked from best to worst, are presented below:

1. Fund school construction through its current mechanism and fund water quality projects through a new user fee or polluter’s tax to address current needs now.
2. Fund school construction through its current mechanism and fund water quality projects through a bonding program to address current needs now – the longer the delay, the greater the costs over the long run.
3. Fund school construction through its current mechanism and, if taxing or bonding is off the table, divert funds from other state government programs to fund water quality projects.
4. Enact the Governor’s plan, extending the sales tax increase and diverting some portion to water quality projects.
5. Extend the sales tax increase and keep all of the funding for school construction.
6. Do nothing, let the sales tax increase expire, allow Iowa’s water and school quality to deteriorate, and cost the state thousands of long-term jobs.

Ultimately, Iowa should not have to choose between funding either school construction or water quality projects, especially since needs for both are expected to increase in the future. Both school construction and water quality projects create good, middle-class jobs that provide very similar value added to the economy. Reallocating funds from other state programs or implementing fees on polluters are better courses of action from an economic impact perspective.

Both school construction and water projects are investments in future success.