Growth & Justice Blog

Less Government? We Tried That. It's Not Working.

The Star Tribune's front-page story today finds that "less government'' is the overwhelming consensus "vision'' for Republican gubernatorial candidates. Peggy Lee and most Minnesotans want to know: Is that all there is?   

Leaving aside that this mantra sounds more like hard-right, activist-energizing radio talk than inclusive vision casting — and has to be extremely disappointing to hundreds of thousands of moderate and progressive Republican voters — we need some context here.   

The Price of Government, an official state Minnesota Management and Budget measure, shows that we DO have less government over the last decade, ever since the no-new-taxes religion, like some southern invasive species, got a hold on the North Star State. (See page 13 of the PowerPoint presented at the capitol last week by State Economist Tom Stinson and State Demographer Tom Gillaspy).

The bar graphs clearly show that our governments are using about two percentage points less (15.5 percent in 2008 compared to about 17.5 percent through the 1990s) of our personal income share than those governments were spending when the economy was actually doing better. Huge income tax cuts in 1999 and 2000 left us with chronic  budget crises, and the promised payoff in sustained, tide-rising economic growth didn't materialize, either.  

Wealth concentration at the top got worse, bridge and road conditions deteriorated, public school course offerings were cut, and thousands of working low-income folks lost their health care. And our economy is slumping and beginning to underperform the national average on some key indicators.  

We surely could use some more judicious restructuring and redesign of how we do our government work. But the basic things government provides are essential for our shared prosperity and quality of life.  

NOTE: The Price of Government measure is one of the most comprehensive of all the measures we have to describe the size and role of government. It counts state and local government revenues as a percentage of total income and therefore accounts for inflation, population growth and economic growth. It was instituted at the behest and with the approval of business groups in the late 1980s.

— Dane Smith

Business leaders focus on success in schools, community priorities

Times are tough in the world of commerce these days but the Minnesota Business Partnership put on an uplifting and clever show Tuesday night, highlighted by a very funny Twitterfest orchestrated by partnership director Charlie Weaver. The fictitious tweets that flashed up on the big screen were inspired, including the one ascribed to Gov. Tim Pawlenty, under the name "veer2right'', in a reference to his presidential prospecting.  

Our favorite part, though, was the recognition afforded to two outstanding public schools, King Elementary in Deer River, and Dayton's Bluff Achievement Plus Elementary in St. Paul, for their progress on student achievement. The videos celebrating and explaining their success should be up soon on the partnership website. (The Partnership is comprised of the CEOs of Minnesota's 100 largest companies and obviously is a major player in policy matters.)

Qwest CEO John Stanoch, a valued member of the Growth & Justice Board of Advisers, and a leader of the partnership's education policy team, pointed out in his presentations of $10,000 awards that both schools have high percentages of poor and minority students and that those conditions "do not have to be synonymous" with low test scores. The principals at each school talked about setting goals and focusing constructive and energetic attention on the students and parents who need help.   

The evening's speakers were focused on community building, with relatively little of the dissing of the public sector or tax rates that sometimes occurs in business gatherings. Even Gov. Tim Pawlenty's keynote address was notable for its rather harsh denunciation of private-sector irresponsibility and arrogance, epitomized by General Motors.  

Doug Baker, CEO of Ecolab, Inc., current chairman of the partnership, took aim at Minnesota's corporate income taxes as a problem, and we agree that those rates could come down as part of an overall revenue-positive tax system reform. But Baker's speech also accurately summarized Minnesota's great tradition of community-minded rather than self-interested business leadership, going back to the Dayton's department store decision a half-century ago to donate 5 percent of its profits to the community. Corporate foundations currently invest about a billion dollars a year in Minnesota, Baker said, "and there's a culture here of stewardship.''  

— Dane Smith

The subsidy game: Slouching toward Wisconsin

The Star Tribune's Thomas Lee reports that "Another Minnesota company leaves for Wisconsin."

Dr. Joseph Ward, vice president of Marketing, said: “RJA Dispersions chose John Wold’s River Bluffs Business Center not only for its attractive location and economics, but also for the availability of industrial level power. Bill Rubin, director of the St Croix Economic Development Corporation coordinated key resources including availability of financial support from Char Gurney and the West Central Wisconsin Regional Planning Commission which is making our expansion plans possible in this difficult financing climate.”

Emphasis mine.

Hey, I get why a manufacturer might covet "availability of industrial level power," even though it's a mystery to me why the company could find better power in Hudson, Wisconsin, than is available in 3M's backyard. Just a hunch, but I think the "availability of financial support" probably played a bigger role.

Hudson is also home of the long-vacant St. Croix Meadows dog track, which promised big crowds, fancy restaurants and an influx of high-rolling tourism when it opened in 1991. You'd think communities would learn, but maybe the weeds growing up in the cracks in the parking lot aren't enough of a reminder.

This move is hardly on the same scale, but it brought to mind that only last week, Dell Inc. announced that it will shut down its state-of-the-art desktop computer manufacturing plant in Winston-Salem, N.C. facility by January, with the loss of 905 jobs.

Dell was promised more than $300 million in state and local incentives to open the [$130 million] plant. But it was required to invest $100 million, create 1,700 jobs by September 2010 and maintain those jobs for 10 more years. If those terms weren't met, the company would forfeit the incentive package.

Dell owed the state another 800 jobs in less than a year. Folding the state-of-the-art tent seems almost honorable.

Dell says it "will absolutely continue to comply with and honor all agreements with various governmental entities," which means it will pay back at least some of the help it received to locate there. As required.

[Winston-Salem Mayor Allen] Joines said he was assured by Kip Thompson, vice president for facilities, that Dell will honor its commitment to repay the $15.56 million the city has provided since Dell agreed to build the plant.

But millions of dollars won't be returned. Public agencies paid to prepare the Dell site for construction, widen roads leading to the plant, and equip community colleges to train company workers before the plant opened.

Our friends at Good Jobs First remind us that Dell was more aggressor than suitor. Greg Leroy's chapter on corporate tax dodges [PDF] details how Thompson ran the negotiations:

“Here’s what it’ll take,” Dell vice president Kip Thompson told Commerce Secretary Jim Fain in May 2004, according to Fain’s notes. “1) free land; 2) free bldg.; 3) no taxes; 4) training at $5m; 5) participation in creation of future value in the community.” The
following month, Thompson said to Fain: “[I am] not wowed here—not sure the state’s stepping up here ...If a state like N.C. can’t get after this, I’m worried for our country — there’s a certain amount of patriotism here.”

Meanwhile, Dell has announced that it would move its Irish operations to Poland in exchange for a 54 million Euro ($80 million) subsidy. The Poles are grateful, but say they are undeluded about the way the subsidy game works.

[W]ith wage costs rising, people here know they may have just a decade to make the most of the “Dell Effect” before the company vanishes again.

Although there's no specific talk of tax concessions in the brief story about the Minnesota company leaving for Wisconsin, the "another" in the headline implies it is part of a trend, and it may be tempting for readers to assume that our supposed unfriendly business tax climate is to blame.

But Wisconsin's total taxes as percent of income is now about 12.2 percent, ranking 13th, compared to 11.8 percent and a 19th ranking for Minnesota.

Let's hope Wisconsin doesn't decide to become Minnesota's Poland. Then, who will be Wisconsin's China?

— Charlie Quimby

Funding transportation through "value capture"

After the bruising battle over the 2008 transportation bill, the Legislature requested a study of "value capture" as a potential way to raise revenue for future infrastructure investments in Minnesota. The University of Minnesota's Center for Transportation Studies has released its analysis of eight potential strategies for funding transportation based on the concept.

Currently, transportation improvements are funded by general revenue (based on the assumption that all benefit indirectly from the transportation network) and user fees, such as gas taxes and transit fares. The rationale for value capture is based on the relationship between transportation networks and urban land value. [See diagram.]

Investment in transportation infrastructure — ranging from new roads and freeway interchanges to light rail lines and transit stops — improves accessibility to desirable locations such as jobs, shopping and entertainment. Property thus made more accessible tends to become more valuable. Developers and landowners benefit from this higher land value.

Value capture mechanisms seek to harvest a payback from the value created by the public investment. The revenue is then directed to pay off the improvements or finance new ones.

The study is quite lucid in spelling out the pros and cons of eight potential value capture approaches based on four criteria — economic efficiency, equity, sustainability, and perhaps most important for the Legislature, feasibility.

It will come as no surprise to students of tax policy that the most feasible measures have relatively low visibility to general taxpayers.

Perhaps the most intriguing of the eight approaches is Transportation Utility Fees (TUFs). TUFs treat transportation networks like other utilities and can be based on factors related to transportation demand, such as parking, square footage or type of facility. They are simple to administer and generate a stable revenue stream. But, as with any new "fee," there are drawbacks to getting them authorized in the first place.

The 12-page policy summary, "Harnessing Value for Transportation Investment," is worth a look by anyone interested in finding new ways to raise money for transportation. [Download Policy Summary]

— Charlie Quimby

The public is the loser in "economic war between the states"

Via Clawback, we see a new study by the Public Policy Institute of California that finds that the state's enterprise zones have no overall effect on job growth. That's in line with findings in other states, including Minnesota, that offering tax credits and other incentives to businesses may raise employment in certain areas, but not within the region, because companies move from zone to zone to take advantage of the incentives.

The same might be said about what Federal Reserve economist Art Rolnick has called "the economic war between the states."

It is a war in which states are actively competing with one another for businesses by offering subsidies and preferential taxes. Economists find that there is a role for competition among states when it takes the form of a general tax-and-spend policy. Such competition leads states to provide a more efficient allocation of public and private goods. But when that competition takes the form of preferential treatment for specific businesses, not only is it not “admirable,” it interferes with interstate commerce and undermines the national economic union by misallocating resources and causing states to provide too few public goods.

Still, states hungry for jobs are willing to pay "front money" to untethered corporations, even while shortchanging other services that would make their states more attractive in the long term. In another post, Clawback provides recent examples of how states can shuffle federal stimulus money to pay these incentives.

Cynics might say: what should we expect? Federalism means it is okay for large, footloose corporations to play states and cities like a fiddle so that small businesses and working families get stuck with higher taxes and lousier public services. (And home rule means it is okay for companies to do the same thing to cities and suburbs, fueling sprawl and stretching local tax bases so thin they become unsustainable.)

Says Growth & Justice Policy Fellow for Infrastructure & Economic Development, Matt Kane:

The public sector should pursue economic development policies that result in broad benefits for residents and businesses in the region, especially benefits that will continue to have a positive impact even if specific businesses close or move. 

— Charlie Quimby

Shauxing what we knaux from Caux, on the value of "Social Capital''

The Caux (pronounced "ko") Round Table is an intriguing non-profit group  — based in St. Paul  but with a strong international presence — that advances the principles of enlightened and ethical capitalism.   It recently released its country rankings for Social Capital Achievement.  Like many such comprehensive measures of overall quality-of-life AND competitiveness, the Caux ranking places the U.S at an unimpressive 15th place, and  below other prosperous democracies with more and smarter public investments in education, health-care and other forms of human capital.  

At Growth & Justice, we often make the same case at the national and state level, arguing for Minnesota's need to invest in human capital and infrastructure, pointing out that it has been the secret to our business success.

Even more useful than the ranking itself is the articulation Caux provides for the idea of a progressive business climate.  Here are excerpts from the 2009 ranking report.  

Economic development does not occur independently from social,  cultural and political institutions. Wealth creation is not an isolated, autonomous, self-referential process within communities; it is a dependent variable, subordinate to the dictates of prior conditions.   Markets are organic phenomena; they grow strong and vibrant only in facilitating environments [...] Countries with high levels of social capital achievement are more economically prosperous and provide a higher quality of life for those who live in them.

The report is co-authored by Stephen B. Young, global executive director of Caux, a former dean of the Hamline University Law School and a significant figure in MInnesota public policy circles for three decades. Young frequently draws on the classics and Cicero for inspiration, and for this report he cited the Second Vatican Council's definition of the "common good'' as "the sum of those conditions of social life which enable groups and (italics mine) individuals to achieve their fulfillment more completely and readily.''

Good stuff.

— Dane Smith

Wisconsin, where the venture grass looks greener — so far

The Star Tribune today reports a start-up medical company, which grew out of University of Minnesota research, is considering moving to Wisconsin because of taxes.

No, the decision will not be based on the usual complaint about taxes on the business or its owners. The concern is taxes on high-tech investors in an economic environment where money for research is very difficult to obtain. The company believes investment dollars are greener on the other side of the border because of a Wisconsin law that gives investors in start ups

tax incentives that encourage them to fund risky, early stage companies based in the Badger State. Angel investors there can claim a 25 percent tax credit over two years up to $500,000 per investment; venture capital funds can earn a 25 percent credit over one year up to $2 million per investment.

Research-based medical start ups have ongoing needs for capital as they develop products and get them through the regulatory process. They also may be more mobile than other types of businesses that have already established facilities, suppliers and customers. 

The Governor's Tax Reform Commission proposed similar measures [Download summary PDF] to encourage early-stage investment in Minnesota entrepreneurial and high-tech ventures. There's broad, bipartisan support for change, but this reform is just one of many that must grind through a contentious budget-balancing process.

If the reforms fall through and the company departs to find success next door, Minnesota taxpayers can take cold comfort that they helped fund it. 

— Charlie Quimby

Let the free market do it, not decide it

Tony Wikrent of Nation Builder Books spoke at Drinking Liberally in Minneapolis last week, and The Cucking Stool produced this video from the conversation that ensued.

His comments — on the respective roles of the free market, financial and industrial sectors and the political system — provide a critique of what happens when national goals are determined by theoretical economics and the free market, without enlightened guidance from the political system.

For example, he says, allowing the free market to set industrial policy — say, reducing national petroleum consumption — doesn't necessarily result in the best asset allocation to benefit society. The question, he says, is how do you re-regulate a financial system so that doing the important, productive work that needs to be done is what's profitable?

— Charlie Quimby

Cut my taxes, or I'll kill this job!

Despite many years of running and growing a company as a bleeding-heart liberal, I can't ever remember getting up in the morning and saying: "Today, I'm going to go forth and create a new job!"

Now, maybe State Senator Geoff Michel (R - Edina) — a logical legislator who must've absorbed a few sound fiscal concepts as an aide to Gov. Arne Carlson — knows some people like that. But more likely here, his thinking is shaped by people who say high taxes prevent them from creating jobs, when they really mean they wish they made more money and cutting their tax rate is the easiest way they know how.

The idea that investment helps create jobs has some truth in it, and so does the notion that if investors can make more money by growing a company than by manipulating the stock market, they will do it. Long term, I might even agree with conservative economists on the main point.

But whether you are a state senator or President of the United States, you lose sight of the following truth at your peril. Investors are interested in making money, not creating jobs. And entrepreneurs are just a crazier version of investors. If they have to create jobs to realize their vision, they will do it. But if they could accomplish the same thing all by their lonesome, they would do that in a heartbeat.

So even though I don't automatically get palpitations when some politician proposes cutting corporate tax rates, I just shake my head when I see them claiming that cutting business taxes will "kick start the economy" and "grow jobs."

Still, when Sen. Michel (R - Edina) issued the tax-cut altar call this week — "Let's send a message today that Minnesota is open for business" — True North's Chief said Halleluiah:

Revenue can not possibly increase if businesses are cutting employees, shutting their doors and moving to Nevada, South Dakota and Texas.

True enough, but a big "if." And he failed to draw the connection between what anti-tax dogma says will happen and what is really going on.

A new analysis from the Center on Budget and Policy Priorities lays out why a corporate tax cut is unlikely to provide an economic stimulus any time soon:

“Increasing the after-tax income of businesses typically does not create an incentive for them to spend more on labor or to produce more, because production depends on the ability to sell output."

There's a fair amount of cutting and door shutting happening in the low-tax states the Chief cites, too. But we've been told they, along with Florida, have been absconding with Minnesota's business wealth. This is largely based on business tax state rankings ginned up by the Tax Foundation — not on actual studies that show an exodus is occurring. (Matt Kane offers a counter-view here.)

In fact, the indicators for those states are doing no better than Minnesota's.

Nevada leads the nation in foreclosures, followed by Florida, and ranked 45th (that's bad) in unemployment rate (Florida is 39th). Texas (27th) and Minnesota (25th) are about even on foreclosures; Minnesota's unemployment rate (31st) is 0.7 points higher than Texas's (19th). Fresh business bankruptcy data is not easily accessible, but Texas had been showing a much worse rate compared to ours.

South Dakota is the outlier, but as far as substantial Minnesota industry shutting down here and moving across the border to create jobs, Brad Pitt is more likely to start making babies with Kathy Bates.

— Charlie Quimby

Cross-posted in an edited version from Across the Great Divide

Will tax breaks for green investment bring green jobs?

Gov. Tim Pawlenty introduced yesterday his proposed package to encourage green job creation in Minnesota. His "Green Jobs Investment Initiative," extending a variety of tax credits to businesses and investors, has been called "Green JOBZ." 

That nickname is unfortunate.

It's true, part of what he's offering is just JOBZ warmed over — not a concept that will excite JOBZ's many critics. But he's also suggested some other positive steps to encourage private capital investment, expand infrastructure for alternative energy, raise awareness of energy conservation and discourage greenhouse gas emissions.

It's good he's getting out front on the issues of jobs and clean technology development, but he also got out ahead of a legislature-sponsored Green Jobs Task Force that has been laying out how to tackle the green jobs issue. The bipartisan group, which includes legislators, executive branch agencies, business and environmental representatives, had scheduled to bring out a legislative action plan in December and a report in January.

This political maneuvering aside, our question is whether longer-term tax credits will actually have much impact on creating jobs today.

JOBZ's tax breaks were aimed at increasing employment in communities where economic growth was stagnating. It's debatable how many new jobs overall were created. As much as two-thirds were part of planned expansions or simply moved from one place to another.

Green JOBZ faces another hurdle. It's trying stimulate job creation in a relatively young sector that has already received a lot of venture capital scrutiny. Although investment in green industry has been growing, there have also been signs that venture funds have not found enough compelling opportunities to invest in green industry.

A 2007 study by New Energy Finance found that venture capitalists had spent only 73 percent of the funds that had been raised for green technology, and several green tech funds closed their doors that year. More recently, the research group calculated that global investment in clean-energy projects fell by almost 25 percent in the third quarter 2008, and it will likely fall further by year end.

Persuading those investors to put more money into clean technology is a laudable policy goal, but it's a very different challenge from getting a machine shop to locate its new facility in Long Prairie instead of Bloomington.

Gov. Pawlenty's plan offers tax incentives for regional investment funds to invest in Minnesota (only 50 percent of the credits will be targeted for green industry, however). Using tax breaks to boost expected investor returns seems like a good move, but it's also a move any state can duplicate.

Of the more than $13 billion in public and private investment in U.S. clean energy in 2007, nearly $9 billion was made in wind energy, a sector where Minnesota has some advantages. Venture capital funds favored solar energy development, though, with $1 billion of the $2.7 billion they invested in renewable energy technologies. By virtue of geography and technology base, Minnesota will be less competitive for these funds.

Green industry by any name will be good for Minnesota, and it seems churlish to question any well-intentioned effort to grow jobs and lessen our dependence on fossil fuels. But we also should look for the most effective role government can play in encouraging future industry — while addressing jobs today.

For the thousands of Minnesotans who are out of work or underemployed, "offer tax incentives and the jobs will come" won't offer much encouragement. Let's hope the Green Jobs Task Force has more about ideas about creating jobs than Green JOBZ.