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MN2020 - MN Can Learn from Bad Iowa Subsidies
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MN Can Learn from Bad Iowa Subsidies

December 20, 2012 By Lee Egerstrom, Economic Development Fellow

The second in a two-part series. Read part one.

Dolling out tax giveaways sometimes unfairly boosts one company within an industry over the competition. Right now, Iowa, in an effort to keep jobs from going to Illinois, is subsidizing fertilizer producers.  While boxing out it's eastern neighbors, Iowa's support also puts several Minnesota companies at a competitive disadvantage.  The news isn't all bad for Minnesota, especially the state's farmers.

It will be a few years before economic development officials can appraise the results. In the meantime, Minnesota policymakers would be wise to track Iowa developments.

Here's the background.

In early November, Iowa state officials proudly announced that suburban Chicago fertilizer manufacturer CF Industries had agreed to invest $1.7 billion to expand its Port Neal, Iowa fertilizer plant. It will make nitrogen fertilizer to serve farmers in the Corn Belt and create an estimated 100 jobs.

To keep CF Industries from expanding across the Mississippi River in its home state, Iowa provided a tax subsidy and direct assistance package that could total $57 million over the next four years.

Iowa is getting good at this. Each job will cost Iowa taxpayers, state and local governments and Iowa school children about $570,000 per job.

Two months earlier, international construction and manufacturing concern Orascom Construction Industries announced it would build a $1.4 billion fertilizer plant in southeastern Iowa. While costly, state officials insisted that their more than $100 million in tax incentives were less than those offered by Illinois just four miles away.

Regardless, the tax breaks will cost Iowans more than $650,000 for each of the 165 permanent jobs to be created from the project, according to the Iowa Policy Center nonprofit think-tank.

The Minnesota 2020 report Chasing Smokestacks, Stranding Small Business pointed out that these breaks are becoming corporate entitlement programs and tend to get financed by taking money away from other citizens and businesses in the respective states.

A recent New York Times series, The United States of Subsidies, points to a border war between Kansas and Missouri that got AMC Entertainment to move its headquarters a few miles from Kansas City, Mo., into Kansas. While Kansas was giving up $36 million for this dubious achievement that mostly impacted employees’ commuting times, Kansas was cutting its education budget by $104 million.

The New York Times articles showed that no states have clean hands when they massage the tax codes to routinely rob Peter to pay Paul, to use the old expression. In the case of the Kansas-Missouri border wars, the latter got some revenge when a few months later it enticed Applebee’s to move its headquarters out of Kansas.

One of the voices of reason cited by Story was Kansas City corporate executive Donald J. Hall Jr., of the Hallmark greeting card company who complained the tax subsidies divert money from education and only move jobs, not create them.

We’ve seen that in Minnesota, though less so in recent years. But Kansas and Missouri would be more productive if they declared a truce on tax subsidies and settled state bragging rights once a year in major college football stadiums – especially if their tax base allowed them to support and maintain universities their football teams could be proud of.

That said, let’s take a closer look at what Iowa is doing. On at least a couple of levels, the Iowa fertilizer subsidies make a certain amount of sense.

First of all, both Orascom and CF Industries will be building up supplies of nitrogen fertilizer products important to agriculture throughout the central states. The main feed stock for making nitrogen fertilizer is natural gas, which is now gushing from oil fields and shale deposits within easy transport to Iowa.

That means the Iowa plants will be aligned with the major resource needed for production, and they will also be centrally located among the end users – the farmers – who need nitrogen for their largest of all field crops.

What’s more, important foreign investment is coming into Iowa. Orascom, with 2011 sales of $5.5 billion, is an Egyptian company that makes fertilizer in its home country, elsewhere in Africa, and in Asia and Europe.

States tend to ignore ethical questions about subsidizing one or more companies within an industry, including within states where they do business. Orascom and CF Industries – a company founded and spun off by Land O’Lakes, CHS Inc. and other agricultural cooperatives ($6.1 billion in 2011 revenue) - will be competitors. They also will compete with Mosaic Co., ($11.11 billion in 2012) the Plymouth-based spin-off from Cargill Inc., and to a lesser extent with Potash Corp. ($8.7 billion in 2011) of Saskatoon.

How state, local and in some cases federal tax subsidies don’t violate international trade agreements remains a mystery within diplomatic definitions of market interventions and barriers. Iowa’s subsidies have the potential to harm companies and employees in Minnesota and Saskatchewan, to name just two places.

Should the high price Iowans pay to create 265 new jobs increase nitrogen supplies and lower prices for approximately 150,000 Minnesota, Missouri, Illinois and Wisconsin corn farmers, we should all shout out, “Thank you Iowa!”

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