Bacon's Rebellion

Democracy Thrives in Sunlight

Economic Development Incentives Under JLARC Review

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by

James A. Bacon
in

Are economic development incentives for movie making worth the expenditure?
“Evan Almighty” was filmed in Virginia. The economic impact was less than everlasting.

Virginia’s legislative watchdog agency has embarked upon an evaluation of 76 economic development incentives offered by the Commonwealth, starting with the Virginia Film Office. Grants and tax preferences cost the state at least $147 million in the most recent fiscal year, reports the Richmond Times-Dispatch.

“We don’t have any handle on what is going on,” said Del. Chris Jones, R-Suffolk, House appropriations chairman, and vice-chairman of the new subcommittee of the Joint Legislative Audit and Review Commission (JLARC).

JLARC staff has identified 76 specific incentives for study, including 34 grants, 20 income tax preferences, 18 sales tax exemptions, and four financing programs. The evaluation will focus on how much each program spends, the resulting business activity, and the economic benefits and state tax revenue generated by that activity.

Jones hopes the analysis will give General Assembly money committees a “report card” to guide the legislature when deciding whether or not it makes sense “to be putting this kind of money into incentives.”

Bacon’s bottom line: This is a welcome development. The General Assembly treats economic development incentives as “fire and forget” weapons; they enact the incentives but rarely check if they worked as advertised. In all likelihood, JLARC will find some programs to be effective and some to be obsolete or ineffective. The legislature needs to  diligently weed out the losers.

I hew to the philosophy that state and local governments should pick a few core missions — the administration of justice, public health and safety, education, transportation, utilities, environmental protection, basic social services — and dedicate their energies to achieving world-class excellence in those areas. Any activity that does not fall into one of those buckets is best left alone. The best economic development program in the world is a government that excels at providing core services with a modest level of taxation. All the rest is superfluous.

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10 responses to “Economic Development Incentives Under JLARC Review”

  1. LarrytheG Avatar
    LarrytheG

    well – you’d think the General Assembly reps looking at unemployment rates in their districts and perhaps this map would have much more interest in economic development help for the folks they represent.

    you’d think they’d be champions of effective economic development!

    https://coopercenterdemographics.files.wordpress.com/2014/08/20121.jpg

  2. Tom Christoffel Avatar
    Tom Christoffel

    It would be useful to look into incentives provided by local governments. Companies extort incentives, pitting localities against each other – same state/different states. Governments at any level are not in a good position to negotiate with business people, as it is not their primary training and they are obligated to tell the truth. The primary goal of businesses is to make money, not create employment. Some communities write claw-backs into agreements, should the company not open and employ people. Even retail businesses are looking for “incentives” and other guarantees of profit. Kinda like TTP. This is what MBAs and lawyers have given us. Local governments, cities and towns primarily, as that is the original development district, were wise when the goal was “a shining city on a hill”. It is up to the descendants to maintain the vision of the founders and perpetuate the community through maintenance and investment. This is “community motive”, that which preceded the emergence of the “profit motive”. My thesis is that community motive is the basis of the evolution of tribal societies to civilization in cities. Warren Hofstra, Shenandoah University, spoke at a Northern Shenandoah Valley Living Towns event back in the 1990s. He quoted a German traveler from the late 1700s who said, “Virginia has no cities of substance and it would be 300 years before it did”. Interesting that people understood long ago that city-building was a long term prospect. The suburban experiment of zoned dispersion where the automobile is transportation covers territory faster, but is it ultimately efficient enough long term? When homes are the primary tax base of a jurisdiction, it is a limiting factor to raise the revenue needed to fund all the services the residents of those homes demand. Diversifying the tax base involves getting more commercial and industrial rate-ables. Historic towns and cities began as market places, which became sites for industry. Job growth led to housing need and expansion of the territory with extension of services. In suburbia, housing precedes jobs within the tax base territory of the services providing jurisdiction. When attention goes to balancing the tax base, getting high-wage jobs /industry to locate becomes a challenge. Incentives appear. In a world of very mobile capital, it all becomes part of a game that may be unwinable in the short or long term.

    1. LarrytheG Avatar
      LarrytheG

      Agree with 98% of what you say … but point out that localities that have lost their primary economic base have more at stake than places that have a more diverse economic base.

      And to point out the irony that both NoVa and Hampton fret about the sequester which is not about legitimate economic development but essentially cheerleading for either 1. – higher Fed spending fueled by deficits or 2. cutting Fed entitlements like Medicare and MedicAid, that primarily go to help the economically depressed in Va – that, get subsidies also from NoVa.

      I’d do what New York is doing and specifically target economically depressed areas of Virginia to provide totally (state and local) tax-free inducements to industry to locate there… but no such inducements for other parts of Virginia that are better off economically. I’d also provide totally free Community College tuition (including k-12 remediation) for occupational certificates for jobs that exist or for workforce training that employers want and need.

      we have to get our minds straight that we are in competition for jobs… and we have to act to get them – they’re not going to just “happen”.

  3. Steve Haner Avatar
    Steve Haner

    Gonna be a bonanza for the lobbying industry…

    If the goal is to double down on those that work, and review those that have outlived their usefulness, fine. If the goal is to find reasons to eliminate them because the state wants the revenue, and it would like to start with what some legislators think are the easy things, then this might be a difficult process. Virginia is not lagging on all the state-to-state rankings and is not losing its mojo as a great place for business because it has too many preferences or grant programs (although some could go certainly).

    Virginia went a long time without major transportation investment and that caused it to fall out of the top rankings. That trend is now reversing but it will take years to build out the major projects. But it will eventually pay off.

    Virginia’s public universities were once great and affordable and now they are good (some great) but not really any more affordable than in other states, and against many states far less affordable. That trend has not been reversed but needs to be.

    And Virginia has become the land of Eminent Malaise, unable to overcome the NIMBYS and BANANAS and NOPES (nowhere on Planet Earth) who pop up to oppose every pipeline, transmission line, high speed rail line, etc. Big dreamers looking to make big investments are not going to come here if they can’t get the infrastructure permitted and built or can’t rely on the energy. Note to Peninsula: brownouts may be in your future! Kiss that super-collider project goodbye.

    A fourth reason – look at that map and understand that all those localities have a hodge podge of local taxes and regulations enforced by independent and unaccountable constitutional officers holding jobs created under the Tudor kings of England. Yet a great hue and cry continues to eliminate the Dillon Rule, the only real hedge against total chaos.

    Most of the economic development incentives they will be reviewing are little. Some don’t get used at all. And the big ones (like not applying sales tax to manufacturing inputs) are not going to be changed because they are good tax policy. The special tax treatment of retirement income has a large “price tag” but bets on whether that is in any jeopardy? Nope – not going anywhere. The votes just approved another special tax break for a favored group of citizens.

    1. TooManyTaxes Avatar
      TooManyTaxes

      Steve – interesting points. I appreciate your comments on Nay Sayers, but a lot of the nays come from the fact that the benefits of many development projects go to a few, but the costs are shared by many.

      Witness the constant drumbeat from real estate developers for higher taxes to build transportation improvements that enable them to develop or redevelop land and make mega profits. Why should the public pay taxes for a project that enables development and development profits? Developers should make money when they build great buildings for rent or sale. But they need to make major contributions to the infrastructure that enables rezoning. Why don’t developers propose public-private partnerships to build the transportation improvements needed for rezoning? I know the answer.

      MWAA has been seeking taxpayer subsidies for Dulles and public construction of roads for near-airport development of NWAA owned land near Dulles because operating costs at Dulles are very high compared to many other airports. Why not cut operating costs and work to attract low-fare airlines?

      Despite the smart growth rhetoric, increased traffic from Tysons has been clogging not only arteries in Vienna and McLean, but also neighborhood streets. My own street in McLean, which does not allow two cars to pass by each other when cars are parked in the street, is being considered for traffic calming due in large part to Tysons traffic. We see a constant parade of cut-through traffic Monday through Friday.

      We are seeing higher real estate taxes from Tysons, but last year Fairfax County raised residential real estate taxes by more than 5% on average through increased assessments and a higher tax rate. Given the defeat of th meals tax, we may seen the same increases going forward.

      I’m all for growth and new jobs and accept the reality that traffic will be worse here than in most parts of Virginia, and that the cost of living is high. But unless and until the real estate development industry pays its way, we will see a lot more opposition.

    2. LarrytheG Avatar
      LarrytheG

      Steve – I’m totally in favor of ANY pipeline that is a legitimate for-profit venture based on private sector investment and ROI.

      I’m ALSO IN FAVOR of ANY government-regulated monopoly to use eminent domain to secure ONE ROUTE to serve a true public need at prices that are NOT whatever the market will fetch.

      You mentioned Transportation investment – there’s a process for determining where to put roads and rail – airports, AS WELL AS other commerce infrastructure – like powerlines AND pipelines.

      What I do NOT favor is using the power of Govt to subsidize private-sector , for -profit ventures that will market their products at whatever price the market will bear.

      I DO SUPPORT – private industry choosing one path or the other but not corrupting the process into crony capitalism.

  4. LarrytheG Avatar
    LarrytheG

    re: “pitting localities who want more jobs – against each other”.

    businesses are in competition with other businesses – and costs they cannot control affect the prices of what they produce and sell and ultimately their viability as a successful competitor that stays in business and continues to provide jobs.

    I perceive economic incentives – the idea behind them – as an effort to reduce costs to the business – and, in turn, not only attract the business but continue to keep costs down so it can continue to successfully compete – and, in turn, continue to provide local jobs.

    This is true whether the are two companies next to each other but in adjacent jurisdictions but it’s also true for other boundaries – like States – and even International borders.

    One of the biggest costs to American businesses that affects their ability to compete against other businesses especially international ones is the cost of employer-provided health insurance which can and does run to $15,000 and more per year per employee for family coverage.

    To put this another way – in countries that have Universal Health Care – that 15K becomes available to the company to decide how to spend including on salaries and compensation as well as their own capital needs.

    Worse than that – in those other countries where the employees pay taxes to govt for healthcare – it’s about 1/2 what we pay.

    that’s a huge competitive advantage and it has to be recognized as one of the reasons that US companies are going overseas and taking their jobs with them and we – play minor league economic incentive games that dollar-wise are a drop in the bucket for a company trying to decide where – geographically – it can keep more of it’s costs (and what costs) low enough to be a successful competitor on the world market.

    At the least – when we say we want to analyze the value of economic development – we should be willing to take a harder look – holistically at all costs for business and especially so with blue-collar manufacturing where 15K per employee is a significant competitive disadvantage against other countries blue collar manufacturing that does not have that 15K embedded cost.

    and the 15K is even worse than that – because that money is not taxed as income and as such directly contributes to the deficit to the tune of about 250 billion dollars out of the 500 billion current deficit AND it is also exempted from FICA which directly contributes to the future Social Security shortfalls…

    1. TooManyTaxes Avatar
      TooManyTaxes

      And the $15K not paid by employers magically appears. Let’s say Congress adopted universal health insurance – single payer. The $15K or whatever it costs will need to come from taxes. I could see a push to raise much of that money from taxes on employers. How popular would it be if the employees had to pay $15K in higher taxes? So it is reasonably possible that much of the $15K spent by businesses providing health insurance would still be paid by the same businesses.

      Most employees, except for those sans skills and at the bottom of wage scale, would want raises equal to their increased tax burden and then some because the raise would be taxable. Paying employees’ medical insurance is cheaper since its not taxable than paying higher wages that generates income, Social Security and Medicare tax liability. If employees picked up all the taxes, I could see wages rising by $25K to adjust for the tax impacts. It is cheaper for businesses to pay the insurance premiums than to pay higher wages.

      And the deficit has been caused by out of control spending by at least the last two presidents – Bush and Obama and fear of Congress to have government shutdowns.

      1. LarrytheG Avatar
        LarrytheG

        It comes from taxes rather than employer for all the other major countries whose companies are competitors to ours and who outcompete our companies because those costs are not in the their companies cost of competing for Global commerce.

        In fact – wages in this country are FLAT – BECAUSE even though we have increases in productivity – almost every penny of increase is absorbed by increased health insurance costs of employer-provided.

        You say budget is out of control because of Congress – I’d ask you what would you cut? Medicare and Medicaid entitlements or something else like the military – what?

        Budget, taxes, deficits and health care costs should NOT undermine our companies ability to compete with companies in other countries. We’re burdening companies with costs that have nothing to do with their core purpose… and it’s damaging their ability to compete against other companies who are not saddled with those costs –

        we blather on and on about Corporate taxes hurting US companies competitiveness compared to other countries – right? . Corporate taxes are drop in the bucket compared to them paying 15k a year per employee for health insurance out of their profits.

        That’s dumb and it harms not only our US companies, but their ability to provide jobs – and economic gains that in turn WOULD help pay for these other things LIKE higher wages…

        we’re putting all US companies at a competitive disadvantage against all other countries causing harm to our companies, taxpayers, and wage-earners.

        Health care and it’s costs should not be the concern of companies but separate policy.

        we have a DUMB approach to this. Principled Republicans admit this and want to move us away from employer-provided health insurance to one where everyone gets a tax credit for insurance regardless of where they work.

        BUT – TMT – what exactly – ENTITLES anyone to employer-provided health insurance in the first place?

        It’s not an employer benefit. It would not even exist if it were not for the Govt making the money to buy it tax-free as well as rules to require coverage for all employees – and at the same price rather than risk based per person.

        what entitles you to this govt-provided benefit ?

  5. LarrytheG Avatar
    LarrytheG

    Check this out – it’s the GOP Plan to replace Obamacare.

    it provides tax credits to everyone to buy health insurance:

    https://abetterway.speaker.gov/_assets/pdf/ABetterWay-HealthCare-PolicyPaper.pdf

    they say they will not change employer-provided that these credits will only be for those who do not have employer-provided …or who lose their job that had employer-provided.

    but this does not fix the competitive disadvantage problem with our companies trying to compete against other nations countries that do not have those same embedded costs.

    If Trump and the GOP are serious about our companies ability to compete – they’ll address not only corporate taxes but employer-provided health care.

    And this goes back to – economic development efforts in Virginia.

    we’re nibbling around the edges – unless we take a hard look at the actual costs of doing business – and how that affects a business ability to locate in Virginia as opposed to France.. or Singapore, etc.

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