June 2012 Brief: Volume 19, Number 16
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Should Government Pick Winners?
by Deborah D. Thornton
There has been much discussion this spring about Tax Increment Financing (TIF) and the proper use of economic development incentives. Commercial property tax rates have been highly visible, with Iowa House Republicans proposing a broad, across-the-board cut for all property taxes and Democrats offering a much smaller package targeted at only small businesses. However, definitive action on either issue has been stalled because the Democrats have a two-vote majority in the Iowa Senate and are enforcing party line voting by their members.
While this fussing and cussing has been going on, the big boys are coming to town.
A major international fertilizer producer and construction company is proposing to build a $1.3 billion nitrogen fertilizer plant in Lee County. Orascom Construction Industries, based in Cairo, Egypt, is setting up Iowa Fertilizer Co. on 300 acres near Wever, Iowa. The facility is anticipated to be in full production by 2015. It will produce ammonia nitrate, diesel exhaust fluid (DEF), and urea – a liquid fertilizer that can be combined with other crop additives to allow one-pass application. Currently, one-third to one-half of ammonia and urea used for American crops is imported. The fertilizer from this plant would probably be sold in Iowa, Illinois, and Wisconsin.
However, Orascom is taking advantage of every economic development incentive they can wrangle out of the state of Iowa and local governments. This includes $1.6 million in forgivable and low-interest loans from the state, almost $1.2 billion in federal loans through the 2008 flood-relief money, $2 million for road and rail improvements, and various local government incentives. This is not necessarily a bad thing for Lee County, located in the far southeastern corner of the state, with two county seats and a population of about 35,500.
What Lee County doesn’t have is jobs. Unemployment in March was 8.3 percent, down from 9.1 percent in January, yet still one of the highest in the state. The labor force is almost 17,000 individuals, with 15,500 holding jobs. Unemployment for Lee County was as high as 11.9 percent in January 2009. The lure of a huge fertilizer plant, potentially providing several thousand construction jobs over the next two years, and upwards of 165 regular, full-time, good-paying jobs when in operation, is very enticing.
From a free-market, capitalist perspective it is problematic that the company is only investing $70 to $100 million of its own money in the project. Seventy million out of $1.3 billion. This is less than 5.5 percent of the total investment. The rest is being funded by government loans and incentives.
Additionally, the total bonding ability under the Midwest Area Disaster Relief program is $2.6 billion. Orascom is requesting and receiving almost half of this money, at $1.2 billion. What about others? Aren’t there other companies in Iowa that would like this money? Should so much go to only one entity? What happens if they, like Solyndra in California, go bankrupt?
Business owners in Coralville filed a lawsuit against their city for showing extreme favoritism towards businesses in the Iowa River Landing development, including the Marriott Hotel, and VonMaur department store. Apartment owners are converting their buildings to co-ops to avoid the highest apartment property tax rates in the country. And yet a profitable, major multi-national corporation only has to put $70 - $100 million of their own capital into a $1.3 billion project – with the rest being subsidized by taxpayers. The table below outlines the major components of this incentive package.
Governor Branstad is working hard to turn the Iowa economy around, building long-term relationships with the Chinese and others. He is working to get Iowa products sold internationally and to bring new companies in. He is trying to make good on his campaign promises.
The issue is not that Orascom is foreign owned, with the profits going overseas to the Middle East. American companies – from John Deere to Microsoft – have factories in other countries and make profits there. We live in a global economy. This is a good thing.
The issue is that attracting new companies and new jobs to Iowa should not involve the government picking winners through state taxpayer subsidies and federal loan programs, but should be based on lower taxes and a level playing field for all. The Iowa Legislature failed to take significant action on either the Tax Increment Financing system or commercial property taxes this Legislative session – the Democrat Senate was too busy trying to block every effort of the Republican House and Republican Governor. This was unfortunate for all Iowans.
Deborah D. Thornton is a Research Analyst with Public Interest Institute, Mount Pleasant, Iowa. Contact her at Public.Interest.Institute@LimitedGovernment.org.
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