A Common Story of Incentives — This Time in Iowa

This essay originally appeared on my blog at www.seanmrobbins.com.

​I love Iowa. I really do. But what happened there this month is a head scratcher. It shows just how out of control the incentives arms-race has gotten and why political leaders are stuck in the middle.

Earlier this year, Brazilian investment firm 3G Capital and Warren Buffet’s Berkshire Hathaway teamed up to merge Kraft Foods Group and H.J. Heinz Company, two of the world’s largest food producers. When completed, the combined operations will have annual sales revenue of approximately $28 billion and a valuation of around $45 billion, according to Forbes.

In other words, this is a big company. And like any company, big or small, that goes through a merger there are efficiencies that can be squeezed out of existing operations — redundant jobs, machinery, locations, shared services, and others. So, it came as no surprise when a $1.5 billion cost-cutting plan was rolled out earlier in 2015.

Pretty run-of-the-mill business story up to this point.

The company announced that manufacturing operations in Wisconsin, California, Maryland, Ontario and New York are to be shut down by the end of 2017 and 2,600 jobs will go with them. In Wisconsin, the announcement that the 100-year run of Oscar Meyer will come to an end hit the state particularly hard, especially knowing that Chicago would become the new headquarters and an Iowa processing plant would takeover all current Madison production.

Still, nothing so far qualifies as much of a head-scratcher. Devastating to the local communities? Without question. What takes the story from unfortunate to troubling, though, is that the tax incentives Iowa is using to help Kraft Heinz build a new $200 million plant will actually eliminate almost 1,000 jobs.

That’s right. $20 million for 1,000 fewer jobs because “something is better than nothing.”

The State’s economic development director, Debi Durham, said she understood how it looks to be investing in a downsizing facility, but without the incentives, Kraft Heinz would have left Iowa altogether. To some extent, she’s probably right.

Nevertheless, the Iowa Economic Development Authority (IEDA) came under intense scrutiny these past weeks. The Des Moines Register editorial board summed it up this way:

“Enough. The Legislature should re-examine tax breaks in the next session. Iowa leaders cannot reform incentives on their own, but they can take the lead. Our congressional delegation can work together to end the national bidding wars. We can ask presidential candidates their plan to stop the madness.”

The editorial board is right on several fronts. First, recruitment incentives are out of control. They end up simply moving jobs around, not creating anything new for the American economy. Second, as long as one-state does it everyone is forced to do it — and the cottage industry of incentive hunters employed use this to pit one state against the other. As a result, the only real way to solve it will be on a national level — regulatory or tax penalties as examples.

And while some of my colleagues argue these same points on a fairness platform, I do not. As a fiscal conservative, I want taxpayer funds to be invested in ways that produce a clear return on investment — either societal or financial. Especially when our nation’s infrastructure is in need of modernization and our public schools need major performance improvements it’s hard to make sense of a $45 billion company needing a $20 million incentive to layoff almost 1,000 Iowans.

Davenport, Iowa’s mayor said it best. “It’s a sad commentary on modern day capitalism that you have to give up property tax money, which is used to fund our schools, for jobs. But if you don’t do it, we don’t have the jobs to pay our taxes.”

That’s the head scratcher.