Two independent studies pinpoint risks for steel mill incentives
By Roy Ockert Jr.
April 2, 2013
Having a major industrial project in your backyard can be good or bad so it’s well worth studying the potential impact while the project is still in formulation.
Certainly, we’re glad to have new businesses and industries come to Arkansas, especially at such a bad economic time, when more than 7 percent of our citizens are unemployed.
However, some projects don’t work out for the best. Ask the people who live around Mayflower, a small town between Little Rock and Conway. Many of them had to evacuate their homes over the Easter weekend when an Exxon Mobil pipeline ruptured, spilling thousands of gallons of oil into their community and threatening Lake Conway.
En route from Little Rock to Bentonville on Interstate 40 Saturday morning, we passed by the edge of the affected area, and the smell of oil was stifling. It will be that way for weeks, maybe much longer.
Building that pipeline brought jobs to Arkansas, and now we’ve got many more people working to clean up the mess that resulted.
A steel mill is a much different sort of project, but that is the question for Northeast Arkansas, where a $1.1 billion plant is proposed. The General Assembly this week resumes consideration of legislation to authorize a $125 bond issue for the Big River steel mill, which would be built near Osceola in Mississippi County.
It’s encouraging that the plant’s construction would bring some 2,000 jobs and its operation would create about 525 permanent jobs averaging $75,000 annually.
The downside, according to some interested parties, is that the proposed plant, heavily subsidized by the state, could adversely affect two steel plants already operating in Mississippi County with less help from the taxpayer.
No one seems to be concerned about the environmental impact of the Big River steel plant, but that should always be an issue for its neighbors. Environmental studies have been done, both as to the plant’s operation and to the construction of the required electrical facilities and lines, and they show no major concerns.
The Legislature has been more concerned about the financial impact of the Big River steel plant — rightly so, considering that the state and local governments would give away millions of dollars in financial incentives to make it happen.
Two independent studies were commissioned, and the lawmakers received them last week. They aren’t long — the main sections are 25 pages for one for 38 for the other — and surely our lawmakers have read them. If so, they should have found cause for pause. Neither study is exactly a ringing endorsement.
One was done by Regional Economic Models Inc., a Massachusetts- and Washington, D.C.-based firm specializing in economic services related to modeling. REMI’s report is heavy on statistics and harder to understand. But here’s a critical conclusion:
“The economic story is positive for Big River; however, the fiscal impact picture is much more mixed. The large investments and operations do generate jobs, but the size of some of the incentives erodes much of the tax revenue presented to the state in the form of increased economic activity, payroll, taxable income and business sales.”
The study says that a recycling tax credit is the major issue. “Without it, the fiscal impact to the state is generally positive, but if the opportunity cost of the foregone revenue behind the credit counts as a liability against the state budget to the tune of $240 million, then the fiscal impact is negative,” REMI said.
That could be offset by increasing state taxes or decreasing spending elsewhere “to make the budget whole again,” the study says.
“It is up to the state to determine if the positive economic impact is worth some of the fiscal downsides of the project given uncertainties about the firm’s viability as a private enterprise and how exactly it will claim credits,” it concludes.
The other study was completed by IHS Global Insight, an economic analysis and forecasting company headquartered in Englewood, Colo. Its analysis produces much the same conclusion — i.e., that Arkansas is giving away a lot to get the jobs that Big River would provide, and everything would have to go well for the project to pay off.
The IHS study also points out the recycling tax credit as a major burden. “The AEDC [Arkansas Economic Development Commission] correctly assumed that the state would not receive any corporate income tax revenues for the first 15 years of the analysis period,” the study says.
IHS lists a number of other variables that could reduce the state’s economic benefits from the plant. Among them are the need for the new plant to operate at a high level of output and employment, the timely payoff of a $50 million state loan and the threat of similar competition developing. IHS also said that, given the plant’s location in a corner of the state, there is likely to be “significant leakage of direct spending out of the state’s economy.”
IHS recommended that the state analyze these variables further, concluding, “Our analysis indicates the probability that the project will produce net economic benefits for the state is highly dependent on the assumptions made for some key variables for which there is substantial uncertainty.”
Roy Ockert is editor emeritus of The Jonesboro Sun. He may be reached by e-mail at royo@suddenlink.net.