Growth & Justice Blog

A Minnesota business expands out of state. Are taxes to blame?

A valued, long-time Minnesota business announces it's expanding across the border. Is this more fodder for those who claim corporate taxes are driving business to lower-tax neighbors? Or does it illustrate how business expansion plans respond to a complex mix of factors?

South Dakota is usually cited as the destination for migrating Minnesota businesses — typically without naming any specific companies. But in this case, it's North Dakota that will benefit from an expanding Minnesota company.

Marvin Windows, headquartered in Warroad, has announced plans to nearly double the size of its facility in Grafton, ND, adding up to 50 new jobs over the next five years. Marvin's Warroad location employs about 2,500.

But lo and behold, North Dakota isn't quite a low tax haven of the sort we're told is going to strip Minnesota of its economic growth. In fact, it ranks just above Minnesota in total state and local taxes as a percentage of income and two places higher in corporate income tax rankings percentage of income. The complete state rankings compiled from Census Bureau data by Growth & Justice and the Minnesota Budget Project are here [pdf].

It's true North Dakota is a comparatively low personal income tax state, but the company isn't moving to there to lower income taxes for the owners. The Marvin family is staying put in Minnesota, and most of the 475 jobs created at the Grafton plant, which opened in 1997, have been filled by local residents. 

(1)Total revenue includes federal government revenue and own-source general revenue — which together make up general revenue — combined with utility, liquor store, and insurance trust fund revenue.

Let's look at some of the likely factors figuring in Marvin's decision.

Labor. The labor supply has to be a concern for Marvin, with its major manufacturing facility located in remote Warroad. Polaris Industries has a large plant in Roseau, the next nearest town. With two large employers drawing workers from the thinly populated region, at some point as they grew, they'd likely look elsewhere for labor.

Grafton, with a population of 4,600, is roughly the size of those two cities combined and is located in farm country, where skills, work ethic and the lagging farm economy offer a ready source of workers. Labor costs were lower in 2003, with the average job in the county paying $22.2k vs. $27.9k in Roseau county.

Location and Infrastructure. Though like Warroad, Grafton is relatively isolated, it's near the major north-south freeway artery Interstate 29, which meets east-west I-94 at Fargo. Grafton also connected east-west to Warroad. Marvin undoubtedly saw that infrastructure as an advantage when it originally located there. And having a plant already in that location meant the company was more likely to expand there than in a new place. Also, as an energy producing state, North Dakota has lower industrial power costs than Minnesota or South Dakota.

Incentives. Rolling out the green carpet might have a modest attention-getting effect — if the financial incentives are coupled with other positives in a community. Grafton was not one of the locations originally considered back in 1996 when Marvin was looking to expand, but it did put together an incentives package that included a new industrial park and a spec building to help interest site selectors.

This time, Marvin already announced its plans to expand before the city votes on a possible 10-year tax exemption for the addition and sponsoring an interest buydown on a loan. As we've noted before on subsidies, they make the less sense when a company is already in the region. It's unlikely, given the current housing construction market, that Marvin would be very interested in breaking ground in an entirely new location.

Business Taxes. Lest anyone think I'm gaming the numbers, here's the low-tax-advocating Tax Foundation's ranking of the states. Although North Dakota generally scores better than Minnesota on the "business friendly" indexes, it's nowhere close to South Dakota.

 

Let's pause here to make our general disclaimers about all tax rankings. Numeric rankings can distort small differences; they're based on averages or rates that don't necessarily apply to actual taxes in individual cases; they may not measure what they claim or even measure the right things in the first place. And just about any state or advocacy group can find a ranking that either rankles or reinforces, as shown in Grading Places: What Do Business Rankings Really Tell Us? [pdf].

Thirty-four of the 50 states can claim that they are in the top 10 in terms of business climate or competitiveness; they just have to pick which of the five indexes they want to point to. Business interests in just about any state can find at least one ranking to support an argument for cutting business taxes to make the state more competitive. In all but eight states, one can find at least one index that puts the state in the bottom half of all states.

Bottom line? While tax considerations may be part of a business expansion equation, it's never as simple as the low-tax advocates would like you to believe.

— Charlie Quimby

Mall of America deal highlights subsidy issues

A last-minute change  in the tax bill agreed to over the weekend raises anew the issue of public subsidies for private business development. The change was made to a subsidy proposal for the Mall of America's $2 billion expansion — from a provision apparently crafted specifically to include Chanhassen Dinner Theatre in the project, to language that excludes a dinner theater.

Chanhassen Dinner Theatres have operated for 40 years in downtown Chanhassen on the western fringe of the Twin Cities metro. A move to the Mall of America would provide a more centralized location and better access to tourist audiences. The Mall says the dinner theater provided a key part of the project's viability.

The private benefits are clear; the public payoff is less so.

The Mall subsidy was being sold on the basis that it would create thousands of jobs throughout the region and would eventually produce state tax revenues that would be shared with other cities. That much may be true, but it would also be true with a privately financed project.

The Mall's owners have already identified this region as the place where they want to do business.  If lenders don't want to finance the project, it's not as if Mall of America can expand in Sioux Falls. A Mall expansion, by definition, can occur only at its present location and it must make economic sense in that location.

Under the approved tax bill provision, Bloomington could levy local sales taxes on its hotels and business. Some local officials complain that the financing the public costs fall unfairly only on Bloomington. That's not technically correct, since half the Mall's sales are to out of state visitors and a large portion of the remainder are to consumers from outside the city. By taxing only Mall businesses, hotels and car rentals, the city would effectively export much of the tax burden. It's debatable whether an additional sales tax would cause many consumers and visitors to take their business outside the city.

In short, it's a bad idea to subsidize a project that has no chance of happening in any other location and needs 17 percent of the total project cost underwritten by public money to attract private capital.

The dinner theater deal raises the advisability of providing public incentives to relocate businesses within a region — the same issue that has dogged the JOBZ program. Chanhassen loses; Bloomington wins and says its victory will benefit its neighbors, too. But by what measure will we know?

Matt Kane, policy fellow for Infrastructure & Economic Development at Growth & Justice, has written extensively on the effects of tax breaks and subsidies on business location. He urges taking a broader view when considering such proposals.

From an economic standpoint, growth at one location within a regional economy drives growth for the regional economy as a whole, so tax incentives designed to draw businesses to one location in a region instead of another have little or limited impacts on overall regional growth. That being the case, tax incentives for economic development work best where they are least justified by swinging decisions from one site to another within the same region — the region the firm already has identified as the one they want for their new location.

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. 

Reps. Joe Hoppe, R-Chaska, and Paul Kohls, R-Victoria, represent the Chanhassen area and played some role in changing the language that blocked a move by the theater. They say they acted on principle, not parochialism.

And though we might not often find ourselves siding with Hoppe and Kohls on tax matters, this is one where we agree.

— Charlie Quimby

Weighing factors in Twin Cities and South Dakota corporate expansions

Here's some more grist for the taxes-hurt-the-business-climate debate.

The Twin Cities metro area ranks 5th on Site Selection Magazine's 2007 list of top metro areas for corporate expansion. With 74 projects, it was one expansion away from tying for 4th with the Houston metroplex. Last year, the Twin Cities ranked 15th among metro areas with populations larger than one million, about in line with its rank as the 16th largest U.S. metropolitan statistical area.

We'll offer our usual cautions about the validity of such state comparisons, and note that the rankings are based on numbers of projects, not type of industry, dollars of investment or number of quality jobs added. Still, Minnesota clearly had a better than average year.

The magazine also publishes a state business climate ranking that put Minnesota in 22nd place. That list is based on new projects, including number adjusted for state size and population, plus a survey of corporate real estate execs. The site selection criteria ranked most important by the real estate execs are shown in the sidebar. Workforce skills rank first.

The survey respondents rank the state much lower (30th) than actual expansion activity indicates, resulting in Minnesota's lower "business climate" standing. In previous years, the planners also scored the state lower than it has performed on the projects index.

Those who like to cite South Dakota as "proof" that low taxes attract business growth will also find something positive in the annual ranking. The Sioux City area ranked 1st among under-200,000 metros for the second straight year. Note, however, that the region includes communities in Iowa, Nebraska and South Dakota.

A Site Selection story said the Sioux City area is looking forward in 2008 to the construction of a giant oil refinery proposed by Hyperion Energy.

The company said it selected the Union County site because it "has a unique combination of characteristics that make it ideal" for the project. "Geographically, it is in the Canadian crude oil corridor, close to good rail and highway transport, in the vicinity of many major markets and has an abundance of water," Hyperion noted on its Web site.

The company also mentioned the pro-business attitude of South Dakota government officials and its low-tax climate.

With its biggest 2007 deals coming from ethanol, beef processing and other ag-related industries, it's clear the region's growth is based on more than workforce and tax considerations.

Debi Durham, president of both the chamber and the Siouxland Initiative, says it's no accident that the Sioux City area is being considered by major corporations. "You have to go back to a decade ago when the Siouxland Initiative stepped forward with a strategic plan for intermodal transportation, education, health care, quality of life and building our infrastructure," she says. "We worked on getting many industrial sites in our broader region certified. The fruit of that effort is the number one ranking in Site Selection."

That sounds like a familiar formula.

— Charlie Quimby

Business tax reform commission needs a balanced perspective

Last week, Growth & Justice sent a brief letter to the members of Gov. Pawlenty's new 21st Century Tax Reform Commission offering support and suggesting questions we hoped the business leaders on commission would consider:

• How will changes affect your current and future employees, customers and communities where you do business?
• How might reforms impact the adequacy and stability of state and local revenue? 
• Can changes that help business also make the system fairer and less regressive?
• What is the value to business of public investment in education, transportation and health care, and what should be its ongoing contribution to this investment?
• How should government and taxpayers measure the effectiveness of tax cuts, business incentives or other reforms? 

We also weighed in with a post about the relationship between business taxes and business loophole seeking.

This week, Katherine Blauvelt at Minnesota Budget Bites surfaced a 2006 Star Tribune Business Forum commentary in which Michael Vekich, the newly appointed chair of the commission, set forth five tax policy principles that track pretty well with our questions. That's encouraging.

But we still have concerns about what outcomes we can expect from a business-centric commission with a charter that starts from the assumption that tax reform is the key to increasing Minnesota's economic competitiveness.

While the individual appointees are all worthy, as a well-rounded team, the commission has some holes. For example, there's no representation from green industries or agriculture (unless you somehow count General Mills). Both are important to Minnesota's future and are subject to a variety of specific tax policies and investment considerations. Also missing are any advocates for consumers, education and labor. Employers aren't the only ones concerned about the economy, job climate and impact of business taxes on costs.

We hope the commission will find ways to fill in these missing perspectives.

— Charlie Quimby

It takes two to tangle a tax system

Last week, when Gov. Pawlenty announced his 21st Century Tax Reform Commission to reform business taxes, in Massachusetts

Governor Deval Patrick's quest to tighten corporate tax laws and reap hundreds of millions of dollars in new revenue might be undermined by a last-minute amendment providing new offshore tax breaks that was tacked onto the legislation by the House, according to state officials.

I'm not going to prejudge the outcome of the Minnesota Commission's work, but it will be interesting to see if this panel of business people will operate under any different mindset than their business lobbyists do, slipping in amendments that take money out the back door while reformers like Patrick are walking around closing the windows.

The issue hinges on a complex tax regulation called combined reporting, which is designed to prevent large, multistate corporations from shifting certain profits to other states that have lower tax rates. The House-approved corporate tax legislation would require companies in Massachusetts to combine all income and apportion the Massachusetts share.

Minnesota is gradually shifting its apportionment of corporate taxes toward a heavier weighting on sales versus property and payroll. This will benefit companies with headquarters or a major facility in Minnesota that sell products nationally or worldwide. Companies that sell in Minnesota but have relatively modest in-state operations may pay more with a sales-only formula.

Whenever there are differentials in tax rates, businesses will try to exploit them. While those favoring reduced state taxes focus on the threat of businesses leaving the state, uprooting operations carries its own costs and risks. It's usually more practical for a company to do the same thing any governor does — shift the money.

Instead of moving revenue between departments and programs, the business seeks ways to move sales and expenses to different states or countries with more favorable policies.

For example, this Wall Street Journal article described a Wal-Mart maneuver establishing an office in Florence, Italy, for the purpose of avoiding Illinois taxes.

The dispute with Wal-Mart is part of a wider effort by some states to crack down on what they believe is abusive use of so-called 80/20 companies. These companies are domestic subsidiaries that conduct at least 80% of their business overseas. States typically don't tax income from outside the U.S., and many companies have used 80/20 subsidiaries to legitimately shield foreign operations from state taxation.

The Commission's charter is to look for tax-related barriers to business investment and capital formation and for ways the business tax system can be simplified. So far, so good. But no government sets out to create a complicated tax system. It gets that way over time as individual and business taxpayers seek ways to pay less — and seek incentives that supposedly advance the public good.

Almost any change in the tax code contains potential for new mischief. If the Commission's recommendations can help state businesses without creating new losers and new loopholes, the members will have done great work indeed.

— Charlie Quimby

Will suburbs pay for urban development?

Debate over the transportation bill — and the funding of transit as well as roads and bridges — typically  fell along party lines. But it might also be characterized as a disagreement between the short-termers and the long-termers.

One side tends to look at today and go year-by-year and pothole-by-pothole. The other side looks farther into the future and recognizes that the world we face tomorrow might not simply be an extended version of today.

An article in The Atlantic [via Twin City Sidewalks] looks at market forces underlying signs of housing decline in certain suburban communities. The march to exurbia is unlikely to continue:

A structural change is under way in the housing market — a major shift in the way many Americans want to live and work. It has shaped the current downturn, steering some of the worst problems away from the cities and toward the suburban fringes. And its effects will be felt more strongly, and more broadly, as the years pass. Its ultimate impact on the suburbs, and the cities, will be profound.

The article chronicles research that forecasts a likely surplus of 22 million large-lot homes by 2025 and discusses implications for that housing stock as more Americans choose to live in places that are less segregated from work, shopping and entertainment. At the suburban fringes, for example, developers have forsaken regional malls to build "lifestyle centers" similar to Maple Grove's Arbor Lakes and infill developments like St. Louis Park's Excelsior and Grand.

In their most advanced incarnation, these places combine walkable streets with access to diverse retail, more dense housing and  transit.

[R]ecent consumer research by Jonathan Levine of the University of Michigan and Lawrence Frank of the University of British Columbia suggests that roughly one in three homeowners would prefer to live in these types of places. In one study, for instance, Levine and his colleagues asked more than 1,600 mostly suburban residents of the Atlanta and Boston metro areas to hypothetically trade off typical suburban amenities (such as large living spaces) against typical urban ones (like living within walking distance of retail districts). All in all, they found that only about a third of the people surveyed solidly preferred traditional suburban lifestyles, featuring large houses and lots of driving. Another third, roughly, had mixed feelings. The final third wanted to live in mixed-use, walkable urban areas—but most had no way to do so at an affordable price.

If some McMansion developments lose favor in the coming years, their fate may first resemble what happened to urban housing as populations began to shift to suburbia in the 1960s — declining values, influxes of low-income families and even conversion to apartments.

But the article notes that "the infrastructure supporting large-lot suburban residential areas — roads, sewer and water lines — cannot support the dense development that urbanization would require, and is not easy to upgrade. Once large-lot, suburban residential landscapes are built, they are hard to unbuild."

Further, most suburban houses were not built to last — with materials and construction methods that easily withstand conversion.

If a significant population does swing back to a less car-oriented lifestyle, the suburbs will pay — and it won't be just for transit lines.

— Charlie Quimby

JOBZ report: Some value, but is it enough?

Score one for accountability. Effectiveness of public investment? Well...

Even though a new report on JOBZ likely provoked some heartburn for supporters and raised serious questions about its cost-effectiveness, the report provides a useful look into the pitfalls that can afflict well-meaning economic development programs.

Last month, we outlined some concerns about the state's JOBZ program designed to aid distressed areas of Minnesota by providing state and local tax breaks to selected businesses. Today, the Office of the Legislative Auditor released its report. An online summary is available here, and a PDF of the full 129-page report is here.

The report says the JOBZ program has some value as an economic development tool and has attracted or kept some businesses in the state, but it has not been adequately focused or administered.

The amount of value is difficult to isolate precisely, the report says.

Weighing the effectiveness

JOBZ businesses received an estimated $46 million in tax reductions over the first three years of the program, averaging about $75,000 annually per business during the 2004-06 period. The actual size of tax reductions varies widely. About 4 percent of the JOBZ businesses accounted for 49 percent of the total reported tax reductions, while about 44 percent accounted for less than 2 percent of the total.

Although state reports have put the cost per job created at $5,000, or about $2,400 in recurring annual costs, the Legislative Auditor calculated the average annual cost per new job created by JOBZ at about $26,900 to $30,800. Under more generous assumptions, the average annual cost per job would be about $11,300 to $12,900. The average annual wage paid to JOBZ employees is $30,700. 

Among the shortcomings highlighted:

• Subsidies have not been targeted at areas most in need of assistance; counties with greater economic needs have actually experienced lower job growth since JOBZ was introduced
• The value and number of jobs created have been overstated by as much as 20 percent
• Follow up on whether companies have met their obligations has been slow, and some have continued to receive benefits they did not qualify for
• There's no statewide review or budgetary constraints exercised over the local deals
• Businesses that have received tax breaks might otherwise have expanded without incentives
• The program has helped some businesses that compete with existing Minnesota businesses for the same Minnesota customers.

Accepting responsibility

Dan McElroy, commissioner of the Department of Employment and Economic Development (DEED) that administers JOBZ, acknowledged shortcomings and agreed with "the findings that significant changes need to be made to increase state oversight and accountability for program performance." For its part, the Department of Revenue expects to address many of the report's recommendations in its forthcoming tax bill.

While better oversight is a state agency responsibility, the report also makes clear that local government administration plays a major role in the program's lack of focus. Basically any community in Greater Minnesota can apply, and "local governments, not state agencies, determine what job growth and capital investment obligations companies must meet to participate in the program."

Local officials evaluate potential JOBZ companies primarily on their likely effect on the local economy and not on the broader impact on Greater Minnesota. Furthermore, local officials do not consider the full cost of providing JOBZ subsidies, since most of the tax breaks are funded by state government. Some cities find it hard to turn down requests from local businesses for JOBZ assistance and sometimes feel obligated to offer it in order to compete with other Minnesota communities.

[...]

JOBZ is not focused on those businesses likely to contribute to substantial economic growth in Greater Minnesota. In addition, nearly half of the businesses participating in JOBZ are obligated to hire 5 or fewer new full-time equivalent employees.

The audit found some agreements between the localities and participating companies obscure job creation obligations. "A few agreements set no deadlines for companies to meet their hiring commitments. Over 60 agreements do not require businesses to maintain the jobs they promise to create for as long as they are receiving tax breaks."

Now what?

There's plenty of ammunition to be found for partisan sniping, but it's important to note the report does not call JOBZ a total failure. JOBZ started with a decent intent; now we have solid information with which to judge it — and to improve it.

But if tax reductions delivered such sketchy results in better times, how much will they accomplish when  Minnesota's economy is looking increasingly troubled? Lawmakers will have to weigh JOBZ's relative effectiveness in stimulating economic growth in the targeted regions — and decide whether tightening program criteria and holding businesses to their side of the bargain can reduce the cost per job to something less than an outright subsidy.

Finally, thanks to the Legislative Auditor's office for a tough and timely report, and to Gov. Pawlenty's administration for accepting criticism of a favorite program in the right spirit. The public benefits when government focuses on ensuring the accountability and effectiveness of public investment. And it makes us more willing to consider prosperity-creating ideas the next time we're asked.

— Charlie Quimby

Beware of numbers used to sell stadiums — and fight them

A recent Star Tribune op/ed by economist Kenneth Zapp critiques a Metropolitan Sports Facilities Commission-sponsored report that estimates tax revenue derived from local sports arenas. Zapp makes several points commonly raised by opponents of public financing of professional sports stadiums.

First, the report implies that tax revenue from sports facilities would not have been collected had they not been built. This is not true. Every economic study of stadiums has found that professional sports do not create economic value. If people do not have such games to attend, they spend their money on alternative forms of entertainment or events, which are also taxed.

He also notes the analysis does not take into account present value of the future cash flows from taxes and states that it's unfair for other entertainment-related businesses to pay taxes that help build a stadium for a competitor. But he overlooks income taxes in his summary of stadium revenue:

A stadium generates revenue from naming rights, concession rights, advertising, seat licenses, ticket taxes, parking taxes, souvenir and related NFL merchandise sales taxes, media access fees and facility use fees. The commission claims there are multiple uses for a covered venue besides sports; these activities should also pay their portion of the cost.

This is a significant omission, since according to the commission's report [Download Report.pdf], "Over one-half (57%), or $197,700,000, of the total estimated tax revenue is attributable to the personal income tax on professional sports organization payrolls" for the Twins, Vikings, Timberwolves and Wild between 1961 and 2006.

The study did not calculate taxes paid by visiting teams, who pay Minnesota income tax on a portion of the payroll representing the number of games played in Minnesota. I haven't found an estimate of that total, but considering that Minnesota teams have historically lower-than-average payrolls — it seems the out-of-state revenue could be considerable.

Let's assume there were no professional sports teams in Minnesota because we decided not to provide outsized public subsidies. While local entertainment dollars might indeed flow to other taxable entertainment activities and visiting performers, tax revenues would drop unless we changed tax laws.

Here's why.

Even without calculating the actual tax liabilities, visits by out-of-state professional athletes are likely more lucrative for the state, because they have income tax withheld from their game pay, while visiting entertainers pay a 2 percent tax on receipts. A major league baseball player earning an average $2.8 million a year makes $17,284 per game. The Twins play nine home games with in-division rivals, so on average, those teams would presumably pay about $155,000 per player, with the adjusted gross taxed at least at 7.05 percent.

Further, their income is not dependent on gate receipts. In part, it comes from media contracts and economic activity produced in other states. George Steinbrenner pays A-Rod the same to play here regardless of how many tickets we buy.

In our hypothetical world, we may divert our entertainment dollars to dining, concerts, movies and theater, but the overall tax revenue will undoubtedly be less because of the net loss of high-paid employment.

The total loss may not be large enough to matter, it still does not mean the public should subsidize professional sports teams. But it does show we should be cautious when viewing the economic arguments presented by either side.

— Charlie Quimby

When private capital for infrastructure gushes, where does it go?

In Minnesota as well as the rest of the nation, private capital is attracted to new buildings, not fixing old pavement.

As a greater proportion of the nation's wealth edges upward, supply siders assure us it will flow back down as job-producing private investment and public-service philanthropy.

Cutting taxes on the very top earners, the argument goes, is good for the economy. It frees dollars from inefficient government spending and the clutches of special interests, putting the money to work more productively to benefit all Americans.

But as the New York Times reports in a story contrasting approaches to infrastructure building in New Haven, Connecticut, the trickle of private and public spending seeks different streams. And when more funding gushes through private channels, investment in transportation, schools and other vital public assets shrivels.

In the case of New Haven, once the recipient of more federal dollars per person for urban renewal than any other city, private investment now far surpasses public outlays.

[...]

The shift from public money to private wealth in shaping the nation’s cities is evident in national data. Government outlays on physical infrastructure have declined to 2.7 percent of the gross domestic product, from 3.6 percent in the 1960s. Philanthropic giving, in contrast, has jumped to nearly 2.5 percent of G.D.P., from 1.5 percent in 1995 and 2 percent in the ’60s.

In New Haven, Yale University has become the engine for building infrastructure, and good cooperation has developed between the mayor and the university president. But the school's mission is still different from the city's, and wealthy donors have different aims, too.

Philanthropic spending adds mainly to the nation’s stock of hospitals, libraries, museums, parks, university buildings, theaters and concert halls. Public infrastructure — highways, bridges, rail systems, water works, public schools, port facilities, sewers, airports, energy grids, tunnels, dams and levees — depends mostly on tax dollars. It is hugely expensive and the money available, while still substantial, has shrunk as a share of the national economy.

The American Society of Civil Engineers estimates that government should be spending $320 billion a year over the next five years — double the current outlay — just to bring up to par what already exists.

While big business has an interest in solid infrastructure, its importance is less today than decades ago, says the article. Big companies are more mobile, and fewer large manufacturers that demand public infrastructure remain in the U.S.

Clearly, communities with declining infrastructure are in a funding bind. Without more revenue, cities and states can't fix things fast enough. Private sources won't invest where they see no direct returns. And public-private investment depends on the right mix of economic conditions, political players and enlightened business leaders.

Yale is the last substantial private enterprise in New Haven. We're relatively fortunate in Minnesota with engaged business leaders who recognize the importance of investment in education and transportation. But even in the best of worlds, there's still a gap between public and private interests.

“Governments are accountable to the democratic process, which has many, many virtues; I would not trade it for anything else,” [Yale University President Richard C.] Levin said. “But it is not particularly good at focusing resources and driving things efficiently.”

[...]

“If you had 30 C.E.O.’s saying, ‘Damn it, we need new bridges or faster trains,’ then that would happen,” said Peter R. Orszag, director of the Congressional Budget Office. “The fact of the matter is that public infrastructure spending does not have much momentum behind it at all.”

— Charlie Quimby

Is JOBZ effective? We need to know more.

The Star Tribune reports that the public has no way of knowing whether Minnesota's JOBZ program is effective at creating jobs in the state's economically distressed areas:

Unlike most government subsidies, the tax breaks given to companies through JOBZ are confidential. That's because state law routinely makes tax returns private, and Gov. Tim Pawlenty and legislators chose not to require disclosure as a condition of JOBZ's breaks when they enacted the program four years ago.

JOBZ applicants do provide data to the Department of Employment and Economic Development (DEED). Although it's not easy to locate online, DEED reports capital investment and job creation/retention information; you can also search by city. But JOBZ reports simply track whether projects meet the goals they set, not how much each project cost taxpayers.

Why not?

Lawmakers apparently didn't think much disclosure was needed, since they didn't require that the legislature receive reports. Both parties supported the program, and reasoned highlighting tax breaks to businesses would just invite controversy.

The public hasn't protested much. The $6-10 million annual cost of JOBZ subsidies is relatively small compared to approximately $250 million annual statewide cost of the tax increment financing (TIF) economic development program. With costs spread across the state, that may not be enough to attract much attention beyond the affected communities, where public reaction is likely to be positive.

Recipients cite privacy and competitive concerns. And if there are questions about the program, the state legislative auditor does have access to tax data shielded from the public view.

Still, there are good reasons to disclose the tax breaks.

Access to information about spending increases the public's trust in government. For that reason alone, tax incentives should be transparent to the broad population of tax payers. But even more important, government ought to be looking for evidence that enables it to make better decisions.

The JOBZ program illustrates some concrete reasons why the right data matters. Knowing the actual amount of tax benefits to the projects would help agencies, legislators and community development groups judge:

Strategic impact. While there may be good reasons to target particular areas or populations with public investment, we should also keep the big picture in mind. Does economic development in one place create negative impacts in another? Could greater benefits have been realized if the tax dollars and resources had been directed to other purposes? Without better disclosure, we don't know the answers.

Cost-effectivess. Determining the impact of economic development subsidies is tough enough with good data. Without knowing the tax break amounts, it's impossible to weigh the cost of lost tax revenues or evaluate whether a project produced a net economic benefit.

Fairness. Firm-specific tax breaks may be unfair to other businesses that don’t receive the same treatment. Not only do subsidized competitors get an advantage, the taxpaying companies may be helping to pay for it. But is it a significant edge? Who can say?

Accountability for results. Without information on the cost side, we can't tell if recipient businesses met objectives that justified public investment. Were the job creation targets set appropriately? Would the same level of development and growth have occurred even without public-sector involvement? What should be the consequences if projects fall short?

Broad public benefit. Public-sector investment is best directed toward services that yield  benefits for people and spur economic growth and development but which the private sector will not adequately provide. Of these, investment in education and infrastructure can yield broad benefits for a region in the long term, even if specific businesses falter, relocate or close. Firm-specific breaks have far narrower impact.

Any state or region can try to attract development with tax concessions and subsidies. But over the long term, a region’s economic advantages will spur development and growth. The public sector can best help foster these advantages through its investment in education and such infrastructure items as roads and transit, airports, water and waste systems, public safety, energy generation and transmission, communications networks, and university-based research and development.

— Charlie Quimby and Matt Kane