How "economic development" makes us poor

[Hohn]

I found this fascinating video that gets at an idea I've been trying to spread for awhile: a loss leader only works if there's a gain follower. Otherwise, it's just a loss, right? Pretty simple concept, but it's one that so many--even senior and very educated people-- just fail to grasp.

For example, my employer has a long-time customer that gets a lot of preferential treatment to the tune of many millions of dollars. Yet if you look in to the sales figures, they haven't bought much of anything from us in a long time-- moreover, they are in such financially poor condition that there's no reason to the think they'd be able to reward our kindness any time soon. So why are we giving them all this preference? This is classic loss-leader-has-no-follower thinking. It's planting a bunch of seed with no soil and no rain. The value of the seed is the fruit.


This plays out in local government all the time as well. Your local economic development authority starts throwing around property tax abatements left and right because "economic development!". Lure a business to come to your locality in the concept that all development is helpful.

Yet-- is it?

What happens when you have a lot of local economic activity, but it doesn't translate into actual higher quality of life? What happens when you have businesses attracted, but you don't get anything in the way of better schools or roads? What if your local GDP goes up higher and higher but there's no improvement in property values, no decrease in crime rates, no improvement in education?

[video=youtube_share;RWTic9btP38]https://youtu.be/RWTic9btP38[/video]

 

[T.Lex]

Hmm... that is interesting.

I'll have to watch it, but here in Indiana, there are some interesting things that happen in this regard. For instance, with the residential property tax caps, the tax burden (for property taxes) gets shifted to commercial property. That can include apartments. So, to get more property tax revenue, cities interested in economic development might encourage apartment buildings, which brings in more people, by density. That can improve certain retail economics in the area, but there's also the increased risk of criminality associated with the higher density.

Lots of complicated factors involved.

 

[Hohn]

True, but the property tax cap in the state is largely toothless because so much of the "development" initiatives are exempted from it.

Very, very few hoosiers are paying property tax rates on the personal home that are actually the 1% in the state cap.


When the cap was being proposed, I wrote a letter to the editor opposing it. I still think it's a bad idea. Capping tax does NOT cap spending! Not when the spending is on things exempted from the cap. Moreover, it makes localities increasingly dependent upon state funding for schools, fire, police, parks, etc. This aggregates power away from a locality and makes for more convenient one-stop-shopping for lobbyists and the well-connected.

Everyone loves spending someone else's money. Of course, that means someone else is spending yours, too.

Plus, it only adds justification for these shady tax abatements and such because "commercial property taxes are higher, thus a barrier to "economic development.""



I've yet to hear a local leader explain why a dollar of spending by a local business is more valuable to the local economy than is a dollar of spending than by a local consumer. Because it isn't, so it can't be explained.

Yet that is the very logic behind these tax breaks to connected businesses. Under Indiana law, SOMEONE is going to get taxed for that spending. And the abatement for a local business (be it TIF, economic development target area, etc) doesn't reduce tax revenue-- it shifts it to the non-TIF businesses or non-targeted areas. It's entirely zero-sum. Which means all if the logic underpinning these things assumes that a dollar of spending by a *new* businesses is more valuable than a dollar of spending by an *existing* business-- or that same dollar spent by a consumer paying higher property tax rates as a result of local business tax breaks.


The essence of real development is this: every dollar of income is someone else's spending. If you want local economy to prosper, you must have more dollars spent there. And if the dollars spent there originated there, the the only value of that is the recirculation effect (so-called monetary velocity). Simple moving a dollar of spending form one local source to another is NOT a net gain.

 

[T.Lex]

Yeah the TIF thing helps things get very confusing.

I kinda disagree about the assertion that TIF areas shift the tax burden to non-TIF areas. If done correctly, the increment in "TIF" is re-invested into that district. So, it ties the .gov spending to the geographic area that produced those taxes.

When there's some slack in the system, and municipalities get creative, things can get sideways.

Don't ask me how I know.

 

[indyartisan]

True, but the property tax cap in the state is largely toothless because so much of the "development" initiatives are exempted from it.

Very, very few hoosiers are paying property tax rates on the personal home that are actually the 1% in the state cap.


When the cap was being proposed, I wrote a letter to the editor opposing it. I still think it's a bad idea. Capping tax does NOT cap spending! Not when the spending is on things exempted from the cap. Moreover, it makes localities increasingly dependent upon state funding for schools, fire, police, parks, etc. This aggregates power away from a locality and makes for more convenient one-stop-shopping for lobbyists and the well-connected.

Everyone loves spending someone else's money. Of course, that means someone else is spending yours, too.

Plus, it only adds justification for these shady tax abatements and such because "commercial property taxes are higher, thus a barrier to "economic development.""



I've yet to hear a local leader explain why a dollar of spending by a local business is more valuable to the local economy than is a dollar of spending than by a local consumer. Because it isn't, so it can't be explained.



Paying 1.5. % property tax here in Noblesville with the constant school referendums.
Some business are getting property tax breaks.
The politicians cry for endless new development.
Who does this benefit?
Follow the money.

 

[Hohn]

Yeah the TIF thing helps things get very confusing.

I kinda disagree about the assertion that TIF areas shift the tax burden to non-TIF areas. If done correctly, the increment in "TIF" is re-invested into that district. So, it ties the .gov spending to the geographic area that produced those taxes.

When there's some slack in the system, and municipalities get creative, things can get sideways.

Don't ask me how I know.

When a TIF is created, money is borrowed based on the assumption that the increment will repay the borrowings and then some.

But the spending happens up front-- the incremental repayment occurs later. And because of how IN local govt financing works, the shortfall is paid for by the levy rate on areas outside the TIF district. So until the increment is actually up and generating actual tax revenue enough to offset the borrowing, the TIF gets a subsidy from areas outside it.

Theoretically then, the future value of the increment would then create a net gain to the areas outside the TIF-- the subsidy flow would reverse.

The problem is that the reversal never happens. This gets sideways for several reasons:

1) the estimated future taxable value is both unrealistically high AND it's estimated to occur much faster than in reality
2) The baseline-- the area below the increment-- that is supposedly frozen ends up being depressed by local assessors. This shifts more of the value into the increment, allowing your local EDC to borrow more, have a bigger slush fund to reward cronies while also shifting the tax burden outside the TIF because there's less taxable base inside the TIF as a result of the baseline being assessed down. (increment inflation).

Columbus is the poster child for how NOT to do TIF and abatements and such. Our local EDC is out of control and we can only hope they are merely ineffective rather than utterly counterproductive.

 

[T.Lex]

Columbus is the poster child for how NOT to do TIF and abatements and such. Our local EDC is out of control and we can only hope they are merely ineffective rather than utterly counterproductive.

I openly scoff at the assertion that Columbus is a poster child for TIF run amok.



What's the total of Columbus' debt? When the EDC passes the $1B mark, let me know.

 

[mmpsteve]

I've yet to hear a local leader explain why a dollar of spending by a local business is more valuable to the local economy than is a dollar of spending than by a local consumer. Because it isn't, so it can't be explained.

Maybe because it's an additional dollar spent that would have not been spent if the business had not been lured there to begin with. I would think additional wages generated, with the accompanying taxes, would pay for any tax abatements, unless dollars are actually forwarded to TIF companies, and that is not my understanding of how the system works. What am I missing?

The business that comes in as a response to tax abatement is a bonus that generates much economic activity. Unless it is a direct draw on funds from the municipality, I don't see the negative impact.

.

 

[Leadeye]

It's a way of funneling public money to private groups by self serving leadership that is connected in some way to these private groups. Somebody is getting rich in Louisiana, it's probably a very exclusive and quiet group.

Always follow the money

 

[mmpsteve]

It's a way of funneling public money to private groups by self serving leadership that is connected in some way to these private groups. Somebody is getting rich in Louisiana, it's probably a very exclusive and quiet group.

Always follow the money

Not to argue, and maybe I'm just naive, but if a location offers tax abatements, is it the same as spending public money, or just foregoing some of the money they would have gotten in taxes, as incentive to bring in the business, which will bring economic activity? The abatement amount is not spent; It's money that would never have been obtained without the company being lured into the area, and the bet is it will be an overall gain in economic activity, and tax dollars. Again, what am I missing here? I get that there may be shenanigans involved, but if no public money is actually spent, and economic activity is increased, I'd think it was an overall gain.

.

 

[Leadeye]

Not to argue, and maybe I'm just naive, but if a location offers tax abatements, is it the same as spending public money, or just foregoing some of the money they would have gotten in taxes, as incentive to bring in the business, which will bring economic activity? The abatement amount is not spent; It's money that would never have been obtained without the company being lured into the area, and the bet is it will be an overall gain in economic activity, and tax dollars. Again, what am I missing here? I get that there may be shenanigans involved, but if no public money is actually spent, and economic activity is increased, I'd think it was an overall gain.

.

Having been involved in getting a small tax abatement I don't disagree that it sometimes works out. I think it's difficult to calculate the net benefit though, particularly on huge projects with big players. It's a system that can be abused easily.

 

[HoughMade]

Damn Amazon better move out of Indiana too. I guess AOC got it right.

Looks to me like one "small" change, letting local entities control tax abatements, would make a huge difference in Louisiana.

 

[Hohn]

I openly scoff at the assertion that Columbus is a poster child for TIF run amok.



What's the total of Columbus' debt? When the EDC passes the $1B mark, let me know.

We're at our statutory debt limit.

 

[Leadeye]

AOC uses some sort of abstract math, until we figure out how it works nothing she says will make sense.

 

[mmpsteve]

OK, so I just watched the video. Very interesting indeed. But just a thought; if none of those industries were in Louisiana at all, would the state be better off? That seems to be what the video would indicate. I would think payroll taxes would add a big chunk to the state coffers. That's not exempt. The vid deals with property taxes. What about income taxes on these corporations? Are they exempt as well?

.

 

[rob63]

Damn Amazon better move out of Indiana too. I guess AOC got it right.

Looks to me like one "small" change, letting local entities control tax abatements, would make a huge difference in Louisiana.

Wait... so you are saying that a video pointing out a specific problem in which Louisiana is different from every other state isn't evidence of something wrong everywhere else? Does the legal system work that way?

 

[T.Lex]

We're at our statutory debt limit.

Pshaw.

That just means ya'all are playing by the rules.

 

[Brad69]

I lived for six years in Louisiana courtesy of the USA.
Louisiana is a corrupt and strange place to live they use Napoleonic code.
The average tax revenue for property taxes is .0479% of assessed value the Lowest in the nation and it shows, the homestead exemption is the first $75,000 so if your house value is less than $75,000 you pay no tax.
Trust me the corruption is widespread and comprehensive often local communities are controlled by just a few families.
They are poor always have been and always be poor will be often you will see a new 50k pickup in front of a trailer from 1972.
No way to compare Indiana to Louisiana different culture and people you really have a upperclass and underclass. The forms of government are far different and infested with nepotism and payoffs.

The tax cap was a win down here it stopped a city Council from spending and taxing. They were hell bent on building a new school the tax cap and the referendum getting voted down three times in a row helped.

 

[Ark]

There's two different discussions here: The general wisdom (lack thereof) of race to the bottom development practices, and Louisiana's specific and highly corrupt practices.

https://www.npr.org/templates/transcript/transcript.php?storyId=476799218

In some parts of the country, businesses literally jump back and forth across a state border every few years, racking up ever higher tax incentives every time. They get to play both sides: Demand incentives to move, and extort incentives under threat of taking jobs away. Sometimes it does go national-scale, as we saw with Amazon and the sickening rush by cities and states to grovel at Amazon's feet and offer them all the freebies and exemptions in the world.

You give away all this stuff to get companies in, and then a few years later they're gone, leaving your community with the social costs of the newly unemployed and the environmental costs of whatever the company left behind. It is exactly a loss leader with no follower. The problem is that elected people are the ones making these decisions, and elected people have one overriding incentive: Get re-elected by any means necessary. When jobs come to town, people cheer for you and reelect you and don't look too hard at the costs. When jobs leave town, you can curse the evil companies for betraying the people and...get re-elected.

The companies win, their lawyers win, the elected officials win (temporarily), and everyone else loses. As long as states and municipalities are allowed to set all these policies for themselves, I don't think there's a solution. It's a classic collective action problem. What's needed is for every state and city to say "No, we won't give you freebies anymore, your company will pay its fair share" together, at the same time, with no spoiler communities cutting deals for their own short-term benefit. That's probably not going to happen.

In the meantime, we'll keep footing the bill for corporations to get their welfare, because we need jobs and they have all the power.

 

[jamil]

The video makes a pretty good case that Louisiana is running a great crony scam. But they've failed to make the case that the reason Louisiana is still poor is because they're pissing away their tax base. While they can and do make the case that these tax abatements probably don't impact the state's median annual income much. But it's a dubious claim to say it's why they're poor.

I lived in the deep south for several years and there are a lot more reasons for their lack of prosperity than ending corporate subsidies could ever hope to fix.