PA 315 Government Business Relations

Lecture 5

Agenda

Governments roles with business

Economic growth and government How does government pay for economic development? The case of Californias economic development zone programs

Economic Growth and Government

Definitions of Economic Growth

Common sense definition:

Economic growth is concerned with wealth enhancement, that is increases in financial value (or loss). Economic growth is the increase in the value of goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. Growth is usually calculated in real terms, i.e. inflation-adjusted terms, in order to net out the effect of inflation on the price of the goods and services produced. In economics, economic growth or economic growth theory typically refers to growth of potential output, i.e., production at full employment, rather than growth of aggregate demand. (Wikepedia)

Classical definition

Ignores: all non-financial values issues; also emphasizes short-term financial value over long-term sustainability

Growth and Government

Governments are generally concerned with economic growth (or maintenance if they are highly developed) but they are concerned with other factors as well such as security, quality of life, equity, etc. A review of growth factors indicates that most are somewhat or highly affected by government. Those in bold are highlighted this class.

Factors That Can Lead to Economic Growth (or decline if lacking)

Population Human capital productivity (e.g., education) Innovation (e.g., process improvements or inventions) Land intensification (low yield agricultural to high yield, or plentiful agricultural to in-demand housing) Resource availability (e.g., minerals, specialized workforce, or natural resources such as forests) Transportation (access to roads, rivers, canals, airports) Climate (suitable climate and suitable conditions) Culture and amenities (e.g., desirability of location, products from a location) Synergy among factors (e.g., cluster theory) (more)

Economic Growth Factors (continued)

General government policies (non-business policies affecting peace and stability, public safety, quality of life, welfare) Government policies specifically related to business

Regulatory

macro: fiscal and monetary policy, trade policy; micro: planning, zoning, and inspection for environmental, safety, and quality of life factors

Promotional policies (e.g., corporate subsidies, infrastructure enhancements, risk protection [insurance], seed money and incubation funds, etc.) Government contracting

Economic Development

An activity to encourage private investment in a particular jurisdiction for the purpose of generating or retaining jobs, expanding the tax base, and increasing the general level of economic well-being (Eisinger, 2002)

How Does Government Pay for Economic Development?

Financing Economic Development: Methods

Tax reduction (aka tax break):

Abatement A partial reduction of the property tax liability of a given piece of real estate for a specified number of years For new or rehabilitated industrial or commercial property, blighted property Exemption Freedom from the obligation to pay a particular tax For purchases, investments, and activities other than real estate development, e.g. raw materials, machinery, equipment Credit A reduction in the tax bill For job creation or research and development expenses
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Financing Economic Development: Methods

Public borrowing (based on future income)

IRB (industrial revenue bond): issued by state and local government public authorities. Subsequent loans are either at favorable rates (partially by federal tax exemption) and/or guaranteed.
TIF (tax increment financing): using municipal bond issued based on the expected increase in property taxes that are collected by an economic development agency.

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Tax Increment Financing

Source: ifgfunding.com

Quick sidebar on the recent legal change in CA

Nationally, there has been much debate about the utility of TIF funding Proponents argue that without redevelopment powers (esp. TIF), the core parts of cities around the state would have been disintegrated and that new development is unfairly subsidized (and re-investment is discouraged) Critics argued that it was unfair redistribution and became a corrupted practice. For a critique of redevelopment
using Tax Increment financing, view: http://www.youtube.com/watch?v=0u5aPAyeXGQ

(although the video is about North Dakota, CAs case is nearly the same, except that in CA there are property tax limitations so the affected jurisdictions get less money to provide services)

Financing Economic Development: Methods

Federal sources (programs funded by federal taxpayers), e.g.,

Community Development Block Grant (CDBG) Empowerment and Enterprise Zone Community Development Financial Institution Technology transfer program

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Financing Economic Development: Methods

Special taxes (earmarked for development), e.g.,

hotel tax, use tax on subsidized activity, sin tax, special sales tax

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Financing Economic Development: Methods

General fund (other than tax breaks which are reductions from the general fund)

especially as the ultimate guarantor of investments, e.g., getting better rates through municipal bonds (less risk) providing insurance programs (e.g., flood insurance in coastal areas) improvements/services that promote development (new roads and other infrastructure, special programs to assist business such as training and education, etc.) seed money (one-time grants), e.g., development revolving funds, loan of property for charitable purpose

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Financing Economic Development: Methods

Public-private partnerships (joint ownership which enables larger projects, public land assembly powers, and/or public backing)

public pays part of the expenses for its portion of large projects through a variety of the above mechanisms

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Californias State Economic Development Zone Programs and Local Redevelopment Agencies

Californias Economic Development Zone Programs

Enterprise zones Local agency military base recovery areas (LAMBRAs) Targeted tax areas Manufacturing enhancement areas

California Zones

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Californias Economic Development Zone Programs

Enterprise zones: 42

Designated by California Trade and Commerce Agency (TCA) for 15 years To provide tax incentives to businesses and allow private sector market forces to revive the local economy Tax incentives:

Credit for sales tax or use tax on the purchase of qualified machinery and parts Credit for wages paid by employers to disadvantaged individuals (50% the first year; reduced on sliding scale) Credit of 5% for wages received by qualified employee Deduction of interest income on qualified loans Expensing all or part of qualified property 100% operating loss carry forward for 15 years

Californias Economic Development Zone Programs

Local agency military base recovery areas (LAMBRAs): 8

Designated by TCA for 8 years To attract reinvestment and re-employ workers Tax incentives:

Up to 100% Net Operating Loss (NOL) carry-forward; may be carried forward for 15 years. State tax credits for each qualified employee hired up to $2 million per year with a few provisions. Corporations can earn sales tax credits on purchases of $20 million per year of qualified machinery and machinery parts. Upfront expensing of certain depreciable property, up to $40,000 annually. Unused tax credits can be applied to future tax years, stretching out the benefit of the initial investment.

Californias Economic Development Zone Programs

An example: LAMBRA in the Inland Empire

Norton Air Force Base, San Bernardino

a military installation of the US Air Force selected for close in 1988 and finally closed in 1995 major projects imminent or under way: Stater Bros distribution center, 2007 Pep Boys facility, 2004 Mattels 10-year lease, 2003 Kohls shop a map of the Base:
(http://www.pe.com/localnews/inland/stories/PE_News_Local_D_nortonside26.203763e.html)

Californias Economic Development Zone Programs

Manufacturing Enhancement Areas: 2 (Brawley and Calexico in Imperial County)

Designated to encourage manufacturing and certain agricultural activities for 15 years (1998-2012) Benefits:

Streamlined local regulatory controls. Reduced local permitting fees. Eligibility for state tax credits for each qualified employee hired.

Californias Economic Development Zone Programs

Targeted tax areas: 1 (Tulare County)

Designated for economically distressed areas for 15 years (1998-2013) State incentives include:

Tax credits for sales and use taxes paid on certain machinery, machinery parts, and equipment. Tax credits for hiring qualified employees. Fifteen year net operating loss carry-forward. Accelerated expense deductions.

Redevelopment Agencies
Approximately 400 were located in the state until February 1, 2012 when dissolved by Governor Community Redevelopment Act of 1945 (CRA)

Gave cities and counties the authority to establish redevelopment agency (RDA) Vested the local RDA the powers to fight blight Tax increment financing allowed in 1952 with CA the first in the nation [now first to dissolve]; RDAs also had powers of land assembly, eminent domain

(redevelopment agencies, cont.)

Located in all large and medium-sized cities and counties in the state Set up as a parallel agency; the city council members or supervisors functioned as the board for the redevelopment agency Controlled approximately 20% of the states property tax revenue Cities and counties must decide whether they want to take over all or part or the agencies and the attendant responsibilities