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September 2012 Policy Study, Number 12-11

   

Orascom or OraScam? Corporate Income and Property Tax Reform Needed

   

Economic Development Incentives: Picking Winners and Losers

   

 

Additionally, there has been much discussion this year about Tax Increment Financing (TIF) and the proper use of economic development incentives in Iowa. Commercial property tax rates were highly visible last spring, with Iowa House Republicans proposing a broad, across-the-board cut for all property taxes over eight years. Democrats offered a much smaller package targeted at only small businesses. However, definitive action on either issue was stalled because the Democrats have a two-vote majority in the Iowa Senate and are enforcing party-line voting by their members. State Senator Joe Bolkcom was one of the most vocal opponents of the House plan and led the efforts to block its passage. For example, in February Senator Bolkcom accused the Governor of catering to large corporations who don’t pay any taxes anyway and called the Governor’s proposal for commercial property tax cuts “messed up.”[18]

 

Admittedly, in building this plant Orascom is taking advantage of every economic development incentive they can wrangle out of the state of Iowa and local governments. As of September 12, 2012, the package includes $1.6 million in forgivable and low-interest loans from the state, a $1.7 million job training program, and almost $1.2 billion in federal tax-exempt bonds through the 2008 flood-relief money, $2 million for road and rail improvements, and various smaller, local government incentives.[19]

 

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. About half of the loan is tax incentivized, the rest is forgivable. Unlike Solyndra in California, OCI is not likely to go bankrupt. Construction and fertilizer are long-term growth industries, unlike experimental solar panels. The bonds will be paid back, but because of their favorable tax treatment, Iowa state government will lose revenue.

 

The initial $57.5 million High Quality Jobs investment tax credit was confirmed by the Iowa Economic Development Authority (IEDA) at the September 15, 2012, meeting. Additionally, another $25 million could be authorized in each of the next two years, if requested by Orascom.[20] The various tax and training incentives are 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.[21]

 

What Lee County doesn’t have is jobs. Unemployment in March was 8.3 percent, down from 9.1 percent in January and still one of the highest in the state. The labor force is currently at almost 17,000 individuals, with 15,500 holding jobs.[22] Unemployment for Lee County and the surrounding area was as high as 11.9 percent in January 2009.[23] In order to get these jobs, the Lee County Supervisors also offered local tax incentives to Orascom, in the form of a $133 million property tax abatement deal.[24] 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.

 

But is it “enticing” as in something that is real and will last, or “exciting” as in winning the lotto, only to find out that after taxes are paid you have less in your pocket than before you bought the block of tickets containing the winner? Is this claim of 165 jobs real? Is it based on gross jobs created, or net jobs created? Will the 165 new jobs in Lee County result in unfair competition with existing fertilizer plants which are not being provided with state-of-the-art production with taxpayer money? Will those existing plants fire workers when their sales decline?

 

How many total, or net, jobs will the economy have when the dust settles? Is this largesse to Orascom what it claims in terms of new, regular, good-paying, full-time jobs, or is a giant scam that will just rearrange existing workers from one plant to another with no real gain in jobs? The history of our economy and of “government economic development efforts” is littered with politicians’ claims of “new jobs created,” while jobs lost by competitors to the “winner” are ignored.

 

   

 

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