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