A bidding war between Iowa and Illinois ended yesterday, as an Egyptian company’s representative stood with Governor Terry Branstad to announce plans for a $1.4 billion fertilizer plant in Lee County. A package of state, federal, and local tax incentives worth hundreds of millions of dollars will support the project, costing taxpayers more than $1 million for each of the 165 permanent jobs created.
Orascom Construction Industries is "the largest publicly traded company in Egypt." It will build the Iowa Fertilizer Company on about 500 acres near the town of Wever. Radio Iowa’s O.Kay Henderson summarized part of what Branstad’s team offered to close the deal.
The incentive package includes $7.4 million in refunds on the state sales taxes the company will pay on construction materials. In addition, the company received $50 million worth of investment tax credits. State officials have promised to extend another $50 million of tax credits in future years if legislators don’t enact tax cuts. Iowa officials have also extended a $1.6 million combination grant/forgivable state loan to the company.
The Iowa Economic Development Authority had initially offered a $25 million tax incentives package but approved the larger numbers during a special meeting to avoid being outbid by Illinois.
But wait, there’s more! Iowa Policy Project Research Director Peter Fisher pointed out yesterday,
The state tax credits are in addition to the enormous benefit the state is providing by allocating federal tax-exempt flood recovery bonds to this project. If the interest rate difference – between taxable and tax-exempt bonds – were 1 percentage point, the company would save $320 million in interest payments over the life of the $1.2 billion bond. That would bring the firm’s total benefits to $2.7 million per permanent job, a truly astounding number. Even without considering the federal interest subsidy, the state tax credits would total $687,500 per job, many times the typical level of subsidy in deals such as this.
To my knowledge, Fisher’s calculations do not include these massive local tax incentives for Orascom:
Also today, the Lee County Board of Supervisors agreed to provide Orascom $133 million property tax exemption over 20 years, documents show.
Lee County Supervisor Larry Kruse said the company will pay an increasing amount of taxes over the two decades, starting at $370,000 and increasing to $1.3 million. “It’s a win-win for the county,” said Kruse.
The company plans to use about 500 acres near Wever. It’s the second site Orascom looked at in Lee County. It also looked at a site in Scott County.
Kruse said the first site in Lee County, about 300 acres, was in a floodplain but the new site is not. That eliminates several environmental concerns, [State Economic Development Director Debi] Durham said.
So, not only did this company get Iowa and Illinois into a bidding war, its executives successfully pitted Lee County against Scott County.
Adding the $133 million local property tax exemption to the nearly $110 million the state government is offering pushes Iowa taxpayer cost per permanent job created over $1 million, even if you do not take into account the use of federal tax-exempt flood recovery bonds for the fertilizer plant. Those bonds were originally intended to benefit companies that suffered property damage from natural disasters in 2008.
Durham defended the deal, saying “It’s the biggest incentives package ever offered but it’s also the biggest capital investment” in the state’s history. Branstad told reporters, “We were able to land this project by the skin of our teeth” after Illinois topped the initial offer from Iowa.
I am on Peter Fisher’s wavelength.
Wouldn’t you just love to play poker against the folks who run this state?
They never call a bluff. Companies come calling with demands for tax breaks and big checks, or they’ll build somewhere else. And Iowa just happily falls in line with the demands.
Not only that, Branstad and Durham will make the Iowa Fertilizer Company the “poster child” for the need to lower corporate taxes across the board in Iowa. The argument goes like this:
Branstad warned, though, that this deal nearly collapsed because Iowa’s property taxes as well as income tax rates for individuals and corporations are too high. Branstad used the news conference in his office to call on legislators to act in 2013 to cut those taxes.
“We must not continue to put ourselves in a situation where we have to compete on incentives when, in fact, by making our tax structure more competitive we’ll be able to compete on a much more effective basis for both growing existing industry and new business,” the governor said.
But as Fisher points out,
Research has shown repeatedly that this is a myth, and that in fact, Iowa’s income taxes paid by corporations are competitive with other states. In many cases, giant corporations are paying not a dime in income tax yet getting huge subsidy checks from the state to do things they would do without incentives.
Lee County in the southeast tip of the state has the highest unemployment rate in Iowa, so new jobs are welcome, even though the construction work will be temporary. But when I hear Branstad celebrating the “ripple effect” of this investment, I wonder why he doesn’t appreciate the potential ripple effect of expanding the earned income tax credit, which would cost the state less and help more working people.
When Governor Chet Culver agreed to give nearly 20,000 state employees covered by AFSCME contracts a 3 percent raise at a cost of $100 million per year, Branstad and his advisers screamed bloody murder that Iowans couldn’t afford the deal. But if corporate executives demand more than $100 million in taxpayer dollars to create a couple thousand temporary jobs and 165 permanent jobs, no problem.
Incidentally, the Medicaid expansion Branstad opposes would cost approximately $147 million in state funding over six years. $147 million would be the total cost to the state budget (not the annual cost) to provide basic health insurance coverage for more than 100,000 Iowans from 2014 through 2019. The Iowa Hospital Association sees a large potential ripple effect from that policy.
Any relevant thoughts are welcome in this thread.
P.S. – Rarely have I agreed with Grover Norquist about anything, but the “drown government in a bathtub” crusader did write to Branstad in July to oppose this deal.
Iowa Fertilizer Co.’s project, currently under consideration by the Iowa Economic Development Authority (IEDA) and the Iowa Finance Authority (IFA), would rely almost entirely on state and federal taxpayers – not on private capital investment – to open its doors and begin operations. The plant would be financed by millions of taxpayer dollars in the form of direct loans, bonds, and other government incentives. In addition to the taxpayer exposure from loans, the project will require increased government spending, including $2 million for road construction. […]
I encourage you to urge the IEDA and IFA to reject using taxpayer dollars toward financing Iowa Fertilizer Co. or any other business. If there is demand for a new fertilizer plant, it should be constructed using money from private sector investors – not taxpayers.
UPDATE: Back in the day, Iowa Republicans bashed the I-JOBS infrastructure bonding initiative, with its supposedly reckless borrowing and “temporary government make-work.” But I-JOBS had a lower cost per job created and left Iowa with “very valuable social goods that will serve us for 20 years,” according to Iowa State University economist Dave Swenson. The public benefits of infrastructure projects and flood mitigation are far greater than giving one private corporation hundreds of millions of dollars of tax incentives to build one facility that will employ 165 people.
SECOND UPDATE: The Sunday Des Moines Register discussed the deal in the lead editorial.
The government involvement in the project looks like this: $1.6 million in loans (half forgivable), a $1.65 million road construction grant, $1.49 million in job-training assistance, a $7.44 million sales- and use-tax refund and up to $100 million in corporate income-tax credits. The state also is making available nearly $1.2 billion in bonds that will be exempt from federal income taxes. And, Lee County agreed to forfeit $133 million in property taxes it would have collected on the plant over 20 years.
All of this raises a big question: Does this project and 165 jobs justify a combined investment of nearly a quarter of a billion dollars by government?
That question, unfortunately, comes too late. The size of the deal had been discussed for months in private. The public learned about it only hours before the Iowa Economic Development Authority Board met Wednesday to approve the agreement with Orascom. That morning, the Lee County Board of Supervisors voted to approve its share of the incentive package. Later that day, Gov. Terry Branstad and an Orascom executive announced the project. […]
Taking a cue from questions various candidates have posed during this campaign, that conversation needs to address how forking over $240 million in aid, courtesy of the taxpayers, is different from the government picking winners and losers and why this assistance should not be seen as corporate welfare.
At the very least, before making an investment of public money in a private venture, the state should show tangible evidence of any impact the project will have on the state’s economy. Call it a cost-benefit analysis, like the U.S. Army Corps of Engineers does to weigh the cost of building flood-control projects against the value of the property to be protected.