After Apple deal, tax incentives face scrutiny
- Oct 09, 2017
- Erin Murphy –
DES MOINES — States are willing to give a little money to get a few jobs, and Iowa is no exception.
But Iowa’s various economic development programs, which each year dole out hundreds of millions of dollars in tax relief to businesses looking to move or grow here, have received some extra scrutiny in recent months.
State lawmakers have wondered whether the state is giving away too much money to businesses, and state economists say the giveaways often are unnecessary.
But at the local level, economic development officials say those programs are vital and have provided a return on the investment to the taxpayers who are footing the bill.
The focus intensified with the construction of a $3 billion fertilizer plant in Lee County, in the state’s southeast corner. The project, which was completed this past spring, has been awarded more than $100 million in state tax breaks and has generated 165 permanent jobs.
Late this summer, the Iowa officials announced they were offering Apple $20 million in tax relief for a new data center in suburban Des Moines as part of an overall $200 million assistance package (the rest was local relief). The project is expected to create roughly 50 permanent jobs.
While the $20 million in state money for Apple was not as large as the incentives given to the fertilizer plant, the announcement coincided with news of trouble with the state budget. State officials were forced to make a third adjustment to the budget year that ended June 30, bringing the total in spending cuts and borrowing to $262 million. Critics suggested Iowa should not be foregoing millions of dollars in future tax revenue while the state budget is requiring multiple adjustments to balance.
The debate has seeped into the political realm as candidates line up to run for governor in 2018. Multiple Democrats have argued the state is too generous with its tax incentives.
But local economic development officials say it’s all worth it.
“These programs are an important tool and complement the incentives that are offered by the communities that we represent,” said Lisa Skubal, vice president of economic development with the Greater Cedar Valley Alliance and Chamber. “Debi Durham (executive director of the state economic development board) has done an excellent job being fiscally responsible for how they review projects, and I applaud the attention to detail, that they look at it and evaluate not only for external projects but for existing businesses.”
Big money, big projects
One such example in the Cedar Valley would be a $14.8 million incentive package put together for John Deere, which used the assistance to help fund a $90 million upgrade at the company’s Waterloo Works Foundry. The project helped the company retain a projected 295 jobs, 138 of which have been realized, according to the state economic development board’s 2016 report.
“All of the projects we have, regardless of size, there isn’t one that I can think of that wasn’t a good deal,” Skubal said.
Deere also was the recipient of a $10.8 million incentive package for a $43.7 million investment in 2005. That project created 300 jobs, according to the economic development board’s 2016 report.
McKesson Corporation in 2015 received a $4.2 million incentive package to help build a new, $65 million pharmaceutical distribution center in Clear Lake. The project was expected to create 164 jobs.
Chad Schreck, president and CEO of North Iowa Corridor, the area’s economic development organization, said the company has produced roughly 250 jobs.
“I think it most definitely was worth it,” Schreck said of the incentive package.
CF Industries Nitrogen scored a $31 million incentive package for its $1.7 billion expansion project in Sioux City. The project, which was completed this past spring, created 100 new jobs.
“It gave this whole area a great manufacturing facility for years to come,” said Nick DeRoos, the general manager of the CF Port Neal complex who also served as project director for the expansion.
In the Cedar Rapids area, Rockwell Collins has been a big beneficiary of state incentives: four projects since 2007 totaling more than $28.5 million in tax relief. The various projects have created just more than 800 jobs.
Bait or handout?
State economists argue that in many cases, state tax incentives are awarded to companies that would proceed with the project regardless.
David Swenson, an economist at Iowa State University, said for example fertilizer plants and pork processing plants should not require tax incentives because Iowa is the most logical landing spot for their facilities. Even data centers, like those opened in and incentivized by Iowa in recent years — Apple was preceded by Google and Microsoft — do not need money dangled in front of them because Iowa has low energy costs and a favorable climate.
“They were going to happen anyway,” Swenson said. “Economists can’t make this work out. Economists will look at this and say the taxpayer never gets paid back.”
Swenson said economic development officials “delude themselves into thinking they are creating jobs when they, in fact, are simply putting bait to attract jobs that would happen in the economy nonetheless.”
Peter Fischer, an economist with the liberal-leaning Iowa Policy Project, called most state tax incentives “a waste of money” for many of the same reasons.
“I think it’s gotten out of hand, Fischer said. “It’s just not worth it.”
Fischer pointed to his previous research, which in 2013 concluded corporate tax breaks are “a very inefficient means of promoting state economic growth.”
“Most of the lost revenue simply flows to corporations who are doing nothing different, nothing that they wouldn’t have done anyway,” Fischer’s report says.
Theory and reality
These arguments against tax incentives may sound good in theory, but do not match the reality of competition for projects that will create new jobs, one economic development official said.
John Stineman is executive director of the Iowa Chamber Alliance and a principal consultant with Strategic Elements in Des Moines. He called Swenson and Fischer’s arguments “a great philosophical discussion,” but said the reality is that Iowa competes with other states for projects, and that he thinks it would be self-defeating for the state to not offer competitive tax relief packages.
“At the end of the day you do have to compete for projects,” Stineman said. “We’re not about to lay down arms in that fight over academic principle. … There is a competition taking place and we’re going to do the best we can.”
Durham said more than 80 percent of Iowa’s economic development portfolio is in existing companies, which means the state is focusing on local growth first. She said she understands the criticism of forfeiting future state revenue to chase businesses, even calling the criticism “valid.” But, she said, the state’s tax incentive programs must be considered by the bigger picture.
“You can’t do it without incentives,” Durham said. “Apple’s going to do it somewhere, it doesn’t mean they’re going to do it in Iowa. … It is simply naïve to believe in this world that we have to compete in that we don’t need incentives to land deals.”
Durham touted Iowa’s incentive program, which in most cases requires jobs to be created at a certain wage threshold and does not award the incentives until the project is completed. She pointed to a report published in May by the non-partisan Pew Charitable Trusts that hails Iowa as one of 10 states with the best tax incentive programs.
“Iowa is leading other states because it has a well-designed plan to regularly evaluate tax incentives, experience in producing quality evaluations that rigorously measure economic impact, and a process for informing policy choices,” the report says.