Congress’ recent extension of the Production Tax Credit may have saved hundreds of wind industry jobs in Weld County for the next year, but it re-ignited debate over government aid in the private marketplace.
Government subsidies are more than just favoring a pet project or satisfying a demanding lobby in Washington. Government aid has boosted several industries since the railroads of the 1800s to modern-day windmills and solar farms, to emerging local industry, to even the redeveloped house or commercial lot in a blighted Greeley neighborhood.
Many officials argue that without that hand up — whichever form they take, be it direct subsidies, tax credits, grants or special financing tools — there would be stunted and slower growth.
“We’ve had a history in this country of government coming in and financing innovation and helping industry get started,” said Eric Berglund, CEO and president of Upstate Colorado Economic Development. “We’ve seen it all over the place. If you want it to actually have an impact on society, you have to get it from the bookshelf or the lab out to industry, and the government has had a role in that.”
The state of Colorado, Weld County and the city of Greeley give aid in one form or another to encourage business to locate here and provide jobs to residents, or rehab the old into new to stimulate development.
“I think it’s the way the world is doing business now, and to be competitive and for Greeley to have a viable economic profile, you have to consider those (tools),” said Becky Safarik, assistant city manager for Greeley.
Renewing the subsidy debate
Vestas Winds Systems in the last year sparked the subsidy debate, blaming Congress’ failure to extend the tax credit for its financial troubles and subsequent layoffs. By the end of this year, the company plans to bring its worldwide workforce down to 18,000, a 4,000-employee drop in the past two years. Vestas trimmed its Colorado workforce measurably, resulting in roughly 300 layoffs in the Windsor blade manufacturing plant alone, while it pressured Congress to renew the PTC a fourth time since it began in 1992. Three out of four Vestas plants in Colorado are in Weld.
There was a lot of resistance to renewing the PTC, and it became the poster child for subsidy abuse, especially after the failure of Solyndra, a solar energy manufacturer, which had received $535 million in federal subsidies.
Those advocating renewable energy subsidies are essentially seeking equal treatment with the aid government has been giving oil and gas, coal and nuclear industries for years.
“There’s a real question in terms of wind, as to whether further subsidy will drive technology any further in that industry to make it more efficient,” said Bruce Bullock, director of the Maguire Energy Institute at Southern Methodist University in Dallas.
Rep. Cory Gardner, R-Colo., voted against the fiscal cliff bill that passed Congress and was not happy with the PTC passing within it.
“I certainly think the wind industry needs to get away and off of the PTC,” Gardner said after the bill’s passage. “Most people who say the oil and gas industry is subsidized are referring to tax treatments that oil and gas gets, but it’s the standard depreciation that any business gets.”
The disagreement is likely to drive further debate about all subsidies.
“There’s a lot of talk about not only limiting subsidies and tax credits and lowering rates, but reducing a lot of the incentives for all kinds of companies and sectors,” said U.S. Sen. Mark Udall, D-Colo., after Congress averted the fiscal cliff. “If we were to across-the-board begin to limit all the various subsidies for coal, natural gas and nuclear, and create a new level playing field … Well, the devil is in the details.”
Subsidies through history
Today, federal government subsidies continue to support all forms of energy, be they fossil fuels or renewables like the much-debated PTC, which Congress renewed for one year in recent weeks.
While many complained that the expected $12 billion cost of that PTC over the next decade was too much, it’s just one of many areas that government props up. In 2011, the Congressional Budget Office reported it spent $24 billion on energy tax credits and Department of Energy programs.
“(Subsidies have) accomplished a lot of positive things in society, including developing secure and cheap energy for many years,” said Nancy Pfund, managing partner of DBL Investors in San Francisco, who co-authored “What Would Jefferson Do?,” a historical look at energy subsidies in America dating back to the 1800s.
The historical use of government aid helped create the many transitions into the modern world.
“You can go through every period of American history and talk about how government subsidies affected things,” said Norman Provizer, a political science professor at Metropolitan State University of Denver.
Government financed the intercontinental railroad connecting the coasts; it also helped with the railroad transition from wood-burning to coal. Government also created land-grant universities.
“Much of American higher education was launched through government subsidy provided by Congress during the Civil War when the country had all kinds of other problems,” Provizer said.
Government energy funding began close to 100 years ago and continues today, which has launched into today’s race to become energy independent.
Hydraulic fracturing of shale gas through horizontal drilling — the precursor to today’s drilling boom in Weld County — began as a research project in the late-1970s, with government aid helping drive years of trial and error.
“Shale gas received a consistent 15-year subsidy, which allowed it to mature, ultimately leading to market as new technology,” said Matthew Stepp, senior policy analyst for the Washington, D.C., think tank Information Technology and Innovation Foundation.
Renewable energy — solar, wind, biofuels — came into the picture in the 1990s, with subsidies being counted as far back as 1992.
When gasoline prices skyrocketed in recent years, the nation saw government investment into fuel-efficiency and hybrid and electric cars. Today, residents can qualify for up to a $7,500 tax rebate to buy an electric car — another way to stimulate the industry.
Bringing it home
Just as government aids large industry and innovation to boost the U.S. economy, local government concentrates on propping up its own areas, but more by creating jobs through industrial and commercial development or boosting property values with residential enhancements.
Just last week, the state Office of Economic Development unveiled a bill that will be introduced in this year’s legislative session, titled Advanced Industries Accelerator Act to encourage industry in Colorado. The act would offer $15 million a year for up to 10 years to boost the state’s small high-tech start-ups in a variety of areas, including aerospace, bioscience, electronics, energy and natural resources, infrastructure engineering and information technologies. It’s co-sponsored by Rep. Dave Young, D-Greeley.
It still needs to pass the Legislature, of course, but it’s one more carrot to boost innovation and industry in Colorado. It would be one of many incentive programs the state has in its incentive tool box, which also includes tax credits for job creation.
“Modest incentives executed better than anyone else is the way Colorado wins,” said Ken Lund, executive director for the state Economic Development office. “If we do that really well, we’ll win more companies.”
Vestas, for example, was given a $21 million tax incentive package over 10 years to locate two manufacturing plants in Brighton on the promise of creating 1,350 jobs back in 2008. The PTC helped keep private investment flowing, officials say, with its relative stability. The most recent uncertainty of its fourth expiration since 2000 kept investment at bay and orders low.
Regardless of Vestas’ problems it became an industrial magnet, bringing other industrial uses to the area, said Don Warden, county budget director, who managed the county for more than 30 years.
Leprino Foods is another example of government aid that helped stimulate an entire section of a depressed area of Greeley. The city worked out an agreement with the company with property and sales taxes, as well as tax increment financing, that revamped an entire area in east Greeley where the plant is located. The ultimate result is the company will offer 500 jobs within city limits — all during the recession.
“Leprino is a perfect example, with an old sugar beet factory that was an environmental nightmare, it would be difficult for the private sector to come and make sense of it at all economically,” Safarik said.
The city sold Leprino water at a reduced rate from its industrial water bank and gave it breaks on development fees and property taxes that equate to millions over 20 years.
“Granted for the next 15-20 years, Greeley won’t get property taxes back, because it will pay back the Tax Increment Financing district, but the benefit to the community is it cleans up an eyesore in an area that was polluted and put in a whole new viable industry that not only employs 500-600 people, but the added spinoff for the agriculture and dairy industry,” Warden said. “To me, that’s a perfect example of using a government subsidy to be a win-win for everybody.”
Through federal Community Development Block Grand Funding, the city is able to spend about $800,000 a year to revamp neighborhoods or decaying commercial areas. The city also can use that to assist nonprofits, such as the Salvation Army, which the city is helping provide a new kitchen.
“The market has a hard time taking care of (the older areas) because it’s much easier to develop new,” Safarik said. “Banks get cautious about redevelopment because there may be unseen costs with old buildings, such as lead or asbestos. So when we talk about providing incentives for business from a redevelopment standpoint, it’s to provide a level playing field for properties that are more challenging to redevelop.”
Are subsidies worth it?
Giving away money is always a gamble. The return on investment isn’t guaranteed but when they work, it could reap millions for an industry or community.
In Greeley, for example, tax breaks and the like are not done without due diligence.
“In no instance do we give money away,” said Bruce Biggi, Greeley’s economic development manager. “We’ll just simply waive our right to collect some form of revenue or tax up front, knowing we will eventually collect that value over time.”
Biggi runs all projects through a specific model to gauge companies’ long-term impacts on the area, measuring everything from jobs and salaries to the impact of buying power of the added employees in town.
“We truly get a feel for the (eventual) payback,” Biggi said.
That could include housing sales, property tax growth, additional disposable income in the area, so businesses could move more merchandise.
When it comes to the bigger gambles, such as the Advanced Industrial Accelerator Act just introduced in the Colorado Legislature, or continued research into renewable energy or even more fuel-efficient cars, the risks are always much higher.
Many critics of subsidies, especially to renewable energy, point to the failures like Solyndra. But closer to home, Abound Solar in the south end of Weld went bankrupt last summer, leaving about a $2 million in unpaid taxes to the county. The company drew down $70 million of a $400 million Department of Energy loan guarantee, which will cost taxpayers from $40 million to $60 million, according to some reports. The company blamed its losses on competition from Chinese solar companies that flooded the U.S. market. Now, company officials are being investigated for possible fraud.
The threat of failure in any new industry or project is part of the gamble, but some say subsidies shouldn’t be the sole reason anything succeeds or fails.
“It seems to me you don’t have large scale programs in all things without problems,” Provizer of Metro State said, acknowledging the infamous failure of Solyndra. “You can’t make policy on one good or one bad example. … At some point, you can make an argument that subsidies at certain points are essential. At another point, they’re more an accepted benefit rather than essential. … It’s not going to succeed or fail based on government.”