Even now, with ethanol profits soaring with the rising cost of gas, Minnesota's ethanol plants continue to receive millions of dollars in state subsidies. In the fiscal year ending June 30, Minnesota sent $18.1 million to 13 of the state's 16 ethanol plants.
The so-called producer payments were established when Minnesota's ethanol industry was in its infancy, as a way to induce farmers and others to invest in what was then viewed as a risky venture.
The state payments are winding down, but ethanol producers locally and nationally also qualify for federal tax credits. And, with so many rural cities and counties competing for ethanol projects, new plants often receive property tax rebates, low-interest loans and outright cash grants.
State and local officials say the money is well-spent because ethanol plants create jobs, boost corn prices for farmers and generate more business for local truckers, builders and retailers. A recent report by the state Agriculture Department estimated that Minnesota's 16 ethanol plants support 6,400 jobs and will contribute $1.7 billion to the state economy this year, though some economists consider those numbers inflated.
Yet ethanol's mushrooming profits have given new impetus to arguments that the subsidies have outlived their usefulness.
"There was a time when these [subsidies] were needed, but I think that time has past," said Jim Nichols, a former state agriculture commissioner and a corn farmer from Lake Benton, Minn.
In 2003, Gov. Tim Pawlenty halted producer payments for nine months, angering farmers and ethanol producers.
"We all went in and said, 'Look, a deal is a deal,' " said Bill Lee, general manager of Chippewa Valley Ethanol, a plant in Benson. "You don't get halfway through a program and say, 'Nah, you're making too much money, we're going to cut you off.' That's not a way to put a program together."
The payments resumed in 2004, but at a lower rate of 13 cents a gallon. Annual payments are capped at $1.95 million per plant.
In April, Granite Falls Energy, a newer plant that didn't qualify for state producer payments, merged with bankrupt Gopher State Ethanol of St. Paul in hopes of collecting the defunct plant's payments, which were scheduled to last until 2010.
Minnesota has refused to make subsidy payments to Granite Falls, citing a statute that prohibits such transfers. Gopher State said in a June filing with the Securities and Exchange Commission that it likely will begin legal proceedings against the state if it continues to hold back the payments.
Tom Branhan, chief executive officer of Granite Falls Energy, declined to comment on the dispute.
Eleven of Minnesota's existing ethanol plants, including ones in Buffalo Lake, Claremont, Little Falls, Preston and Winthrop, are in tax increment districts, a commonly used development tool that allows property taxes to be dedicated toward site work, roads and other infrastructure. Since 1982, these 11 plants have received $20.6 million in tax-increment financing from local governments, according to the Minnesota state auditor's office.
Granite Falls Energy, meanwhile, qualified in February 2005 to receive tax breaks under the state's Job Opportunity Building Zones (JOBZ) program, which exempts the plant from sales, property and income taxes through Dec. 31, 2015. During that 10-year period, the plant is expected to receive about $9 million in benefits under JOBZ, according to one estimate by the state Department of Employment and Economic Development.
"The big fear today is, if you don't offer incentives, then ethanol production will go somewhere else," said Shannon Sweeney, an associate with David Drown Associates, a Minneapolis consulting firm that helps local governments draw up incentive packages.
That sometimes results in bidding wars between rural cities. In 2004, Bushmills Ethanol decided to build in Kandiyohi County, which offered a $15 million combination of tax breaks, grants and low-interest loans. Meeker County, also bidding for the plant, had assembled a $14.5 million package.
At a June meeting in Springfield, a city of about 2,100 in southwest Minnesota, city economic development director Malcolm Tilberg warned residents that U.S. BioEnergy would build its plant elsewhere if county commissioners didn't approve a tax-abatement plan.
"This is a gold rush," Tilberg said. "It's rapid, and it's movin'. Either you're going to locate a plant here, or it's gonna go down the road."
On Aug. 1, Brown County commissioners agreed to rebate 95 percent of the plant's property taxes over the next 15 years. The estimated cost of the abatement to county taxpayers is $1.3 million to $1.8 million, depending on the size of the plant. U.S. BioEnergy expects to begin construction on the plant next year.