Iowa’s tax breaks come under scrutiny

DES MOINES - With an election for governor coming up and with courts, universities and the state's natural resources agency, among others, reeling from steep budget cuts and freezes, Iowa's generosity in forfeiting tens of millions of dollars to lure more jobs is coming under the microscope.

Some state lawmakers are wondering whether Iowa is giving away too much to businesses - giveaways some state economists say often are unnecessary anyway.

But at the local level, economic development officials say the programs are vital and have provided a return on the investment to taxpayers who are footing the bill.

'At the end of the day, you do have to compete for projects,” said John Stineman, executive director of the Iowa Chamber Alliance and a principal consultant with Strategic Elements in Des Moines. '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.”

The focus on the propriety of offering public incentives to private businesses intensified with construction of a $3 billion fertilizer plant in Lee County. The Southeast Iowa project, completed last spring, was awarded more than $100 million in state tax breaks and has generated 165 permanent jobs.

Then late this summer, Iowa officials announced they were offering tech giant Apple $20 million in state tax relief to build a data center in suburban Des Moines, part of an overall $200 million assistance package with local aid. The project is expected to create temporary construction jobs, then roughly 50 permanent jobs.

While the state incentive for Apple was not as large as the break awarded the fertilizer plant, the announcement coincided with more troubling news for the state budget.

State officials were forced to make a third downward adjustment to the budget year that ended June 30, bringing the total in spending cuts and IOUs to $262 million.

Critics suggest Iowa should not be foregoing millions of dollars in future tax revenue while the state is cutting money for its vital operations and borrowing more to make ends meet.

With a large field of candidates wanting to take on Republican Gov. Kim Reynolds in 2018, the issue is permeating the campaign already.

Multiple Democrats argue the state is too generous with incentives.

But local economic development officials say it's worth it - and naive to think otherwise.

'These programs are an important tool and complement the incentives that are offered by the communities that we represent,” said Lisa Skubal, vice president for economic development with the Greater Cedar Valley Alliance and Chamber.

Executive Director of the Iowa Economic Development Authority Debi Durham '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,” Skubal added.

Big money, big projects

One such example in the Cedar Valley is 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 chief executive officer 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.

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 Cedar Rapids, 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 more than 800 jobs, according to state records.

The avionics company is Cedar Rapid's largest employer, with about 8,000 employees in the area. But the future of its footprint in Cedar Rapids is uncertain.

United Technologies Corp. announced last month it is buying Rockwell in a deal valued at $30 billion. The acquisition is not expected to close until next year, and the companies are not saying whether the Cedar Rapids operations will shrink, stay about the same or even grow.

Lure or largesse?

State economists argue that in many cases, state tax incentives are awarded to companies that would proceed with the projects regardless.

David Swenson, an economist at Iowa State University, said fertilizer plants and pork processing plants, for example, 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 Fisher, 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, Fisher said. 'It's just not worth it.”

Fisher 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,” Fisher's report says.

Theory vs. reality?

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 it 'valid.” But, she said, the state's incentive programs must be seen in a 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 naive 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 complete.

She pointed to a report published in May by 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 said.