The enormous package of state and local incentives provided to the Egyptian company Orascom to locate a fertilizer plant in Lee County has drawn considerable attention. The package includes $110 million in state tax credits and other incentives and $133 million in local tax abatements — a total of $243 million when all is said and done. All this to attract a plant that will employ just 165 workers.
At a cost per worker of nearly $1.5 million, the incentive is an astounding amount, well beyond the normal range of awards, in Iowa or anywhere else. (While the company claims a large number of ancillary jobs will follow, these claims are unverifiable, and it is not clear how many would even fall to Iowa residents; furthermore, there are always some spin-off jobs with any project, so the valid comparison with other awards is in terms of cost per direct job.)
Yet little attention has been paid to what is possibly the largest incentive provided: tax-exempt bonds, not even included in the above calculations.
Early on in the negotiations, in fact last April, the Iowa Finance Authority awarded Orascom up to $1.19 billion in Midwest Disaster Area (MDA) bonds. These bonds are exempt from federal income tax; Midwestern states affected by the 2008 flood were each given an allocation of these bonds to be awarded to projects in eligible counties — those declared disaster areas after the flood. The $1.19 billion loan would constitute 46 percent of the Iowa allocation.
Because the interest is exempt from federal income tax, the wealthy individuals and financial institutions that would purchase such bonds will accept a lower interest rate than they would require on taxable corporate bonds. The after-tax rate is what they focus on. This means that the company saves money. How much? That depends on the spread between corporate bond interest rates and tax-exempt rates.
Information from officials at the Iowa Finance Authority indicates that the spread would likely range from 1 percent to 2 percent. For a $1.19 billion bond issue to be repaid in equal annual installments over a 20-year period, the savings in interest would amount to between $153 million and $297 million, depending on what the interest rate differential turned out to be.
These tax-exempt bonds could have been used in Lee County or in Scott County; both were flood disaster areas and both, at one point, were under consideration as a location for the fertilizer plant. When the Scott County site was rejected, attention turned to Illinois, specifically the area near Peoria. But neither Peoria County nor any counties surrounding it were eligible for the Illinois allocation of MDA bonds.
This means that Lee County was starting with a huge advantage over the Illinois site: the availability of an incentive probably worth in the neighborhood of $200 million.
While the MDA bonds cost federal taxpayers, there is no loss of Iowa income-tax revenue. (The federal cost comes because the federal government forgoes income-tax revenue on the interest, which must then be made up by the rest of federal taxpayers.) But the point is that, whoever bears the cost, this was a very large incentive that Iowa could provide and Illinois could not.
Thus it raises the question: Given this advantage from the start, why was it necessary for the state of Iowa and Lee County to double down and provide another $200 plus million, especially when the Illinois tax incentives were not even a reality — they had passed the Illinois Senate, but not the House, and the Legislature had adjourned months ago?
Did Iowa just get taken to the cleaners?
Posted by Peter Fisher, Research Director