Growth & Justice Blog

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

Thoughts on the last session

We didn't have any major explosions. Everyone thought we would.
— House Minority Leader Marty Seifert

At the end of the day everyone has to walk away from the table with something they care about. It can't be a winner-take-all philosophy.
— Revenue Commissioner Ward Einess

It's the end product that matters, and I think the end product is very good.
— Gov. Tim Pawlenty

It was the most successful legislative session in the last decade.
— House Majority Leader Tony Sertich

The most productive Legislature in a very, very long time.
— House Speaker Margaret Anderson Kelliher

As history looks back on this session, it will look back very kindly. We did a lot of good things. We've got a lot of challenges ahead of us.
— Senate Minority Leader Dave Senjem

We're not there yet, Minnesota on universal access, we're not there yet, but we're on the path.
—  Senate Majority Leader Larry Pogemiller

Take it from whichever political slant you prefer, the participants in the last legislative session are putting a positive spin on their work. By and large, congratulations are deserved all around.

Our job, though, is to look at the end product from an economic policy and social justice standpoint. A couple points stand out.

1. The budget solution is only temporary. The Legislature was not able to repeal a slowing economy, rising energy prices, growing unemployment and a health care system that is unaffordable for a growing number of Minnesotans. In the next biennium, the Governor and Legislature will still have to face the need to increase revenue. Cutting expenses sounds good until it gets down to specifics.
2. We need long-term strategies, not short-term fixes. Because they are of such high value, the building blocks of prosperity — education, infrastructure and affordable health care — have become the objects of budgetary brinksmanship. Instead, we ought to to be developing long-term strategies to invest in the assets that fuel our economic growth and prosperity.
3. Subsidies still need better scrutiny. JOBZ was a standoff, and the Mall of America expansion will be funded in part by exporting the costs through a tax on shoppers. Now, can anyone tell us what would've happened if there were no taxpayer subsidy of MOA parking? Were they going to relocate to South Dakota?
4. Property tax caps are about state politics, not helping local governments manage their budgets. While mayors are being diplomatic, the associations that represent cities and counties tell it like it is. "We think that in this first year, it's bad," said Jim Mulder, who heads the Association of Minnesota Counties. "We're really concerned about the second and third year is that it could be horrendous."

— Charlie Quimby

Dropout costs are too big for the state to ignore

On yesterday's Midmorning program on MPR, Superintendent of St Paul Public Schools, Meria Carstarphen, joined John Bridgeland, CEO of Civic Enterprises, in a conversation on high school dropouts in Minnesota. 

Bridgeland authored a study in 2006 that surveyed high school dropouts [Download pdf] and found that the problem is far worse in the nation's cities than in suburbs. Supt. Carstarphen serves on a Growth & Justice steering committee that is developing a “Smart Investment" strategy for education in Minnesota. Their conversation tracked closely with our analysis on the staggering social and economic costs of the high school dropout epidemic.

According to the 2006 American Community Survey of the US Census Bureau, the median earnings of a worker with less than a high school diploma are just a little over $19,000, whereas earnings for an individual with a high school diploma rise to $27,500. The cumulative difference in lost income totals nearly a half a million dollars over a lifetime.

Said another way, the individual who finishes high school gains substantially higher income; society and the taxpayer gain as well.   

Research commissioned by Growth & Justice confirms this impact in Minnesota. Lifetime taxable wages in the state grow approximately $251,900 for every non-graduate who becomes a graduate. Economic analysis by Henry Levin and Clive Belfield estimated that the increased tax revenues, plus 10-20% reduced criminalization and lower welfare and government health program enrollment, produced a social benefit to Minnesota of about $1 million for every additional graduate.

Conversely, every dropout will cost the taxpayers $1 million. 

With nearly 10,000 new dropouts each year, the opportunity cost to the state increases almost $10.6 billion annually. The cost of dropping out of high school is clearly too expensive — for both the individual and the state. Increasing high school graduation rates should be among the state's top priorities.

— Angie Eilers

Wisconsin benchmarks Minnesota: How do we look?

We constantly hear anecdotal comparisons of Minnesota to surrounding states, usually based on "tax rankings," "business climate" and "business owners are bolting for South Dakota." But how do border states actually compare themselves to Minnesota?

Competitive Wisconsin provides one answer. It recently published its tenth annual benchmark survey comparing Wisconsin to U.S. averages and to its border states, including Minnesota. I found the report handy for its comparison to the U.S. averages on dozens of benchmarks. The benchmarks typically included the most recent year and the five year trend. Comparisons are drawn from various sources and cover different time periods, depending on the available data.

Rather than extract the Minnesota numbers here with all the necessary qualifiers, I've simply noted where we clearly ranked above or below the U.S. averages. (It's a somewhat subjective, not a scientific, sort. For example, I put Minnesota's private new business starts in the worse category, though the five-year growth rate is slightly above average. But the latest year is half a point and 20 percent below average.) You can see the actual data for Minnesota and the other states here [Download pdf].

Where Minnesota ranks worse than average

• Personal per capita income growth
• Median household income growth
• Employment growth
• Violent crime growth rate
• Cost of living
• Science doctorates granted
• State and local tax burden
• Return on Federal tax dollars
• New business starts
• Exports
• Invested venture capital

Where Minnesota ranks better than average

• Percentage of uninsured
• Violent crime per capita
• Home ownership
• Poverty
• Low birth weights
• Math proficiency
• ACT/SAT scores
• High school graduation rate
• Percent of college grads
• Manufacturing jobs
• Energy costs
• Research & development
• Patents
• High tech employment

In other areas, such as unemployment, highway condition, government employees per capita, obesity and smoking, we were more or less average. Change in state's share of farm income was exactly average, but our five-year trend was through the roof. Ethanol? Hard to say, since it's not about us.

One observation. Where we rank better than average, it might be argued, historic investments in education, health care and infrastructure built up an long-term advantage. Indices where we're worse than average seem more sensitive to current trends and might be leading indicators of erosion in areas where we now do pretty well.

— Charlie Quimby

 

Income gap: It could be worse

A new report on economic inequality contains some old news. The gap between top earners and the rest of the population continues to grow. For Minnesota, the only good news is, it could be worse.

The study by the Center on Budget Policy and Priorities compared income growth rates in each state for three comparable periods in the business cycle over the last two decades. CNN/Money reports it found:

The income gap between the rich and the rest of the population is widening. In 22 states, the top fifth of families made more than seven times what the poorest fifth took home, according to the report. In the late 1980s, only one state — Louisiana — had such a spread. Meanwhile, in more than two-thirds of the country, the wealthiest saw their income grow more than twice as fast as the middle-class over the past two decades.

In Minnesota, the gap was greatest between the top and middle fifths, with top earners seeing average income gains of 50.7 percent over the past two decades, compared to 28.1 percent for the middle. Compared to other states, our rate of growth in inequality was about average (27th) and the size of the gap between the top and the middle ranked 36th. [Download MN summary pdf]

It's worth noting here that the study looked at average incomes and did not track individual households, which would give a more complete picture of changing prosperity for families. (I've written more about that here.) But the trend — driven by wage stagnation at the bottom and growth in forms of income such as rent, interest, dividends and capital gains at the top — is still unmistakable.

The benefits of economic growth were broadly shared for a few years in the late 1990s — the only period in the past two decades for which this was true — but this broad-based growth ended with the 2001 downturn. Once the effects of the recession were left behind, the trend toward greater inequality quickened, as the incomes of the richest families climbed while those of low- and moderate-income families stagnated or declined.

The report also points out that some government policies contributed to the expanding wage and income disparity, including deregulation, trade liberalization, ineffective labor laws and tax changes.

Many states made their tax systems more regressive during the 1990s. Early in the decade, when a recession created budget problems, states were more likely to raise sales and excise taxes than income taxes. Later in the decade, when many states cut taxes in response to the strong economy, nearly all chose to make the majority of the cuts in their income taxes rather than sales and excise taxes.

With the current recession, states are again likely to shift costs to regressive taxes and fees, while resisting investment in education, infrastructure and social programs that can help increase participation in the economy. If recent post-recession patterns hold, the wealthiest families will see their incomes resume healthy growth; the other 80 percent will emerge farther behind than before.

— Charlie Quimby

Well Said, Mr. Nobles, and Happy 25th

It was about 20 years ago and the Office of the Legislative Auditor was getting attention for a series of tough investigative reports on questionable behavior by public officials and poor performance by state government,  which back then was completely dominated by DFLers at the executive, legislative and judicial branches. I was a reporter for the Star Tribune and was impressed by the competence and toughness of the watchdog agency and its director, Jim Nobles. So I wrote a story about Nobles and conveyed the consensus at that time, held by both parties, that he was an inquisitor of unquestioned fairness and tenacity.   

Fast forward to last week and Nobles was in the spotlight again for his agency's tough analysis of Republican Gov. Pawlenty's JOBZ program and the deteriorating state of the state's transportation system. Britt Robson of MinnPost put together a spot-on Q&A with Nobles, focusing on a question about whether the agency was anti-Pawlenty and whether "truth has a liberal bias.''

Nobles' response was a classic statement of the good-government principles that Minnesota has long prided itself on, and which need to be reinforced as we move toward more investments in education, transportation, health-care access and other progressive goals.

MP: So you don't subscribe to the idea that the truth has a liberal bias?

JN: [laughs] No. You know the only way in which that might be true is that I really believe in the important role government can play. But I also honestly believe that once an agency is given a responsibility, it has to be fulfilled in a very serious and cost effective way. I want to bring good value to government. That tends to make me say government is important, if for no other reason than it is extracting a lot of money from the citizens and needs to use it effectively. So I am not one of those who just throw up their hands at government altogether, say they are just a bunch of slugs wasting our money. I believe we can take money and do good things. But I believe you really have to work hard and set high standards. I would like all of government to work the way I manage this office, with great intensity.

Nobles has been the epitome of grown-up integrity and a force for good in Minnesota's public sector for 25 years. He and his office, which had a good reputation before he arrived in 1983, deserve a salute.

Dane Smith

: 

Rybak gets it. Are other leaders listening?

You don't build a recession-resistant economy that creates lasting prosperity with a one-time rebate check or tax cuts for only the very wealthy. The sad state of the economy today is living proof that a tax cut to the wealthy without investments in people has been a failure.

Minneapolis has shown that you build common ground for a recession-resistant economy by investing in people and investing in an environment where opportunity and innovation is fostered.

— Minneapolis Mayor R.T. Rybak

The Star Tribune devoted more column inches editorially praising Mayor Rybak's State of the City address than it gave to reporting on it.

So much for the paper's focus on local news.

Or maybe, in Minneapolis at least, wise investment in economic growth and opportunity for its citizens is no longer considered news.

While the last seven years at the state and national levels have been characterized by trickle-down tax cuts, revenue shifts and disinvestment in the common good, Mayor Rybak's tenure has been guided by the knowledge that a city's business climate can't thrive without patient investment in its people and infrastructure. And city residents need education and a thriving business climate to achieve their own dreams of prosperity.

His annual report on the state of the city nicely makes the case. [Minnesota Monitor has the full transcript.]

But cities can't do it on their own. The state still has a major obligation to fund education, and infrastructure linking cities with the rest of Minnesota is an important part of keeping the regional economy competitive.

More and more, we're seeing other local government executives and leaders around the state speaking out against short-sighted public investment policies — most recently, from Bloomington council member Steve Elkins. 

We couldn't have said these things better ourselves.

— Charlie Quimby

Minnesota finally moves forward on transportation challenges

Hats off to the Minnesota legislature for taking a big step forward for the state’s critical transportation infrastructure this week. And hats off to transportation supporters – from the Chamber of Commerce to advocacy groups to the citizens – who pushed for action now. 

When the Minnesota legislature overrode Gov. Pawlenty’s  veto of the transportation bill, it passed into law a package of important measures that will raise needed revenues by $6.6 billion over a 10-year period and increase investments in highways, bridges and transit. 

All parties concerned knew that the state’s transportation infrastructure had fallen behind — 20 years behind, as Gov. Pawlenty told a crowd in Granite Falls last spring. The dispute was over how far and fast to move forward.

For the 2008 transportation bill, DFL legislators took elements of past proposals, vetoed by the governor in 2005 and 2007, and changed them in ways that attracted crucial support from the Minnesota Chamber of Commerce and the six Republican House members whose votes ensured the override.

No bill is perfect, and this one has drawbacks, particularly its use of the regressive sales tax to finance important investments in metro-area transit. But Minnesota needed action now to ensure a transportation system that is efficient, accessible, cost-effective, timely and reliable. 

Remember the big picture
As legislators and the governor argued over taxing versus bonding versus delaying some projects further, the debate lost some focus on the reasons for taking stronger action now. Here’s a reminder of what was at stake, and why we owe some gratitude to the legislators who kept the big picture in mind.

Population growth.  Vehicle miles traveled today already strain the state’s roadways and try the patience of Minnesota’s drivers, with travel rising two-thirds since 1986 to 56.5 billion miles a year in 2006. The U.S. Census Bureau estimates that Minnesota’s population will expand by more than 1 million residents through to 2030, increasing the number of drivers and the miles traveled.   

Capturing federal dollars.  Inaction by state government would put hundreds of millions of federal transportation dollars at risk. Congress significantly increased the federal highway dollars available to Minnesota under current federal law, but the state must appropriate and commit our share of the funds in order to put those federal dollars to work. 

Avoiding cost increases.  Delays would lead to increased project costs. As MnDOT notes in its 2007 report on highway pavement conditions, roads that fall into serious disrepair require major rehabilitation and reconstruction work that’s more expensive compared to fixing lanes where problems are addressed before road conditions deteriorate. 

Promoting prosperity.  Economic growth and development are influenced – indeed, often shaped – by public-sector investment in transportation infrastructure. The statewide transportation system allows the safe and easy movement of people and goods. It makes places to work, shop and play more accessible. And it lays the base for new business activity that fosters economic prosperity. Clearly Minnesota’s transportation system affects the economic outlook for the state and the well-being of its residents.   

For a state with a long tradition of public-sector investment and innovation aimed at spurring prosperity and improving quality of life, 20 years was long enough to put off action.

*****
Our analysis of the 20-year investment lag helped inform the debate (read it here). In a story about the showdown over the gas tax, MinnPost's G.R. Anderson cited the report as “perhaps the best argument for an increase.”

As the report points out, over the last 20 years, state government spending for highways has not kept pace with increases in inflation and vehicle miles traveled on Minnesota’s roads, leaving a cumulative gap of $13.89 billion over the full period compared to adjusted 1986 levels. The lag in highway spending has been more pronounced in Minnesota than the nation as a whole. 

As for Minnesota’s gas tax, revenues dropped by more than one-third from 2006 to 1986. If gas tax revenues had increased enough every year to keep pace with inflation and miles traveled, the State of Minnesota would have had an additional $3.86 billion, in all. 

— Matt Kane

20 Years Behind: Adding up transportation's half loaves

If we're going to make progress in divided government, we have to realize that no side is going to have it all their way. And we each have to settle for a half a loaf or two-thirds of a loaf, rather than trying to hold on for the whole loaf. And another way of saying that is not letting our view of the perfect get in the way of the good.

— Gov. Tim Pawlenty, speaking about the 2007 Legislative session

The state of Minnesota is about 20 years behind on our transportation infrastructure.

— A statement echoed by all three parties since at least 2003

Yesterday, the Metropolitan Council released its annual survey of Twin Cities metro residents. Respondents identified transportation as the region's top problem (37%). The Star Tribune has a summary report.

That top spot can't be attributed just to heightened awareness of the issue in the wake of the I-35W bridge collapse and tussles over funding for transportation. Transportation has ranked at the top of residents' concerns since the 2000-01 survey.

But it's enlightening to go back even further — the Met Council survey began in 1982 — and consider why  the issue has made such a dramatic  ascent.

Except for a brief spike in 1988, transportation as a number-one concern bubbled under 10% until 1995 when it began to climb rapidly (click to enlarge chart). By 2000, it had surpassed perennial worry over crime. When top three concerns are tallied, transportation also outstripped crime in 2006.

20 Years Behind, a forthcoming study by Growth & Justice policy fellow for Infrastructure & Economic Development Matt Kane, looks at some of the data underlying that shift over a period that covers years under Republican, Democratic and Independent governors, from Rudy Perpich to Arne Carlson to Jesse Ventura to Tim Pawlenty.

It quantifies what happens when the state continually settles for half a loaf or less in funding transportation. Looking at state government spending on highways alone, Matt found it:

has not kept pace with increases in inflation and vehicle miles traveled on Minnesota’s roads, leaving a cumulative gap of $13.89 billion in highway spending over the full period compared to 1986 expenditures adjusted for inflation and vehicle miles traveled. State spending on highways did out pace inflation alone, but adjusting for the increases in both inflation vehicle miles traveled is important in comparing the situation now to the comparable situation 20 years ago.

On the revenues side, the State of Minnesota’s dollars for highways and bridges, including federal funds, would have amounted to an additional $12.64 billion over the 20-year period if revenues each year had stayed even with the adjusted 1986 levels.

This failure to keep up — and to enact transit and smart growth policies that reduce driving — has  consequences that inevitably show up in residents' perceptions. Congestion and related delays increase. And road conditions deteriorate due to deferred maintenance.

The summary of the Met Council's report [Download.pdf] noted "Transportation was more dominant as an issue in the suburbs and rural areas than in the central cities, where crime was of greatest concern." And, I'd add, where more compact development and transit make transportation less of an immediate issue.

It's also important to note that population growth and sprawl will continue to increase demand, while delaying work increases the costs of both new construction and repairs. Thus, the problems compound as each new half loaf of funding is applied.

The Star Tribune story on the survey highlighted that 74 percent of respondents said light-rail transit is a very important or moderately important project to undertake. If you only read the story, you might think that shows a high priority for light rail. Yet in the Met Council's summary, that response also ranks next-to-last in importance among Met Council programs. In fact, programs related to transportation, transit, light rail and smart growth all scored relatively lower in importance.

Does that difference in priorities reflect a meaningful gap? Are citizens identifying the issue but not so ready to support solutions that cost more money?

With the "bakers" starting to assemble at the state capitol to consider transportation funding proposals, we'll soon see.

— 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