State and local economic development policies

1. State and local economic development policies

2. Primary sources of revenue • Federal: Income taxes • State: Income or sales taxes • Proportion depends on state • Five states have no corporate income tax • Good place to incorporate a business (South Dakota) • Seven states have no individual income tax • Good place to retire (Florida) • Five states have no general sales tax • Good place to buy things (Delaware)

3. State taxation and spending • Every state but Vermont has a balanced budget requirement; expenditures can’t exceed revenues in a given years • How to balance the budget? • Cut spending • Raise taxes • Borrow money (through the sale of bonds) • Many states have adopted initiatives/referenda making it difficult or impossible to increase various types of taxes • Many jurisdictions require that voters must approve bond issues in referenda

4. Primary sources of revenue • Local government: Property taxes • Property owners pay based on the assessed value of homes, businesses, cars, other property • A landlord recoups part of the property tax in the form of higher rent • If property taxes are used as the primary revenue source for public education, wealthier areas will have more funding for schools and poorer areas will have less

5. South Carolina Act 388 • Enacted 2006 • Removed owner-occupied homes from residential property taxes used for schools (which generated $0.5 Billion statewide) • Replaced with one-cent increase in state sales tax (exempted groceries) • Purpose was both to cut property taxes and to equalize funding for education • This has produced a shortfall in revenues every year (totaling $143 million by 2012) • Property taxes are more stable than sales taxes – in bad economic times, people are more likely to cut their consumption than to downsize their residence

6. Progressive, Regressive and Proportional Taxation • Progressive: Higher-income groups pay a higher percentage of their assets in taxes • Income tax is generally progressive Regressive: Lower-income groups pay a higher proportion • Property tax is generally regressive Proportional/flat: Everyone pays the same rate • Sales tax is proportional, although the more you buy the more you pay overall

7. Other sources of revenue • Lotteries • First state lottery was established in New Hampshire in 1964 • Goal was to raise state revenue without imposing state income or sales taxes • Now in 43 states + DC (and multi-state games) • South Carolina Education Lottery est. 2002 • Proceeds go to K-12 education and college scholarships • Unstable sources of revenue (novelty wears off) • Voluntary rather than compulsory, but has been described as “a tax on people who are bad at math” • Are poorer people more likely to waste their money on playing the lottery? • Frequently, lottery revenue replaces rather than adds to existing spending on programs

8. Other sources of revenue • Gasoline taxes • Federal (generally 1/3 of revenue) + state • Used for highways and transportation-related infrastructure such as bridges • Competition for funding between highways and mass transit systems (in more densely populated areas) • Federal restrictions attached to funding • Speed limits, drinking age, blood-alcohol content, etc. • “Sin taxes” – alcohol, tobacco

9. State and Local Expenditures • State: • Social services, 36% • Education, 18% • Insurance trust (pensions) 16% • Transportation, 8% • Public safety, 5%

10. State and Local Expenditures • Local: • Education, 38% • Social services, 11% • Utilities, 11% • Environment and housing, 10% • Public safety, 9% • Transportation, 5%

11. How to Recruit Business • Tax incentives • Financial incentives • Direct grants • Examples in South Carolina: • BMW plant built 1992, expanded 2003 • Boeing plant 2009

12. Tax Incentives • Tax reductions • Credits • SC Job Tax Credit program • Enacted 1995, expanded 2007 • $51 million in credits claimed in FY 2009 • $1500-$1800 annual credit per job created, more in economically depressed areas of the state • SC Job Development Credit program • Enacted 1995, scaled back 2004 • Must create at least ten new jobs with benefits • Cash rebate to company based on personal state income axes generated by newly-created jobs • Average of $60-$70 million claimed per year

13. “Right-to-Work Laws” • Under federal law, states have the authority to determine whether a business can be a “closed shop” • Closed shop: You are required to join a union as a condition of employment, if an employer has an exclusive contract with a union • SC and many other states (particularly in the South) prohibit closed shops • You can’t be required to join a union as a condition of employment in SC’ • Makes union organizing much more difficult • Employers would rather deal with non-union workplaces – this gives RTW states a competitive advantage in attracting businesses • How are workers’ rights protected?

14. Tax Incentives • Enterprise Zone: an economically depressed area which is singled out for specific incentives to provide jobs and other economic development • SC Economic Impact Zone enacted 1995 • Up to $5 million in tax credits per year for creating jobs in depressed areas • $24 million average credits claimed per year • Program expanded in 2007 to cover the entire state

15. Industry-specific incentives • SC has a program which provides for tax credits for up to 25% of the cost of rehabilitation a former textile property (such as the Bleachery in Rock Hill)

16. Other types of tax incentives • Land conservation/environmental • Energy Conservation and Alternative Energy • Community development • Venture capital • Tax deductions • Tax abatements (specialized rates for specific projects, e.g., lower or deferred property taxes for the BMW plant) • Capital investment • Increased employment • Research and development expenses

17. Financial incentives • Loans at below-market rates, financed by state bonds • State/local contributions to employees’ pension funds • Direct grants of land, infrastructure (water, sewer, roads), job training costs • SC spends $2 million per year on the readySC program through the technical college system, providing specialized training for employees of potential private businesses

18. Policy concerns • Some businesses are taxed differently/at different rates than others (equity issue) • External cost to other taxpayers – do their taxes go up to make up for revenues lost through tax deals? • Evidence is mixed as to how successful these policies are at producing enough economic growth to justify their cost • Competition among states to attract businesses and offer incentives may result in a “race to the bottom” – low taxes, low services (health, education)

19. Environment vs. economic development • Which is more important, creating jobs or protecting the environment? • Is job creation/economic development worth the damage to the environment (emissions, runoff, pollution)? • Regulations of things like air and water pollution are a disincentive to economic production (extra equipment/monitoring increases costs to business) • Brownfields: Abandoned industrial sites which pose environmental hazards, extremely expensive to clean up to make usable/habitable • Superfund: Federal program providing funding to clean up hazardous waste sites

20. “Environmental Racism” • Land which can be cheaply obtained for industrial/waste uses is generally in poorer areas where property values are lower • Garbage dumps, landfills, sewage treatment plants, etc. • People who live in these areas tend to be disproportionately members of minority groups • Disproportionate impact of health and environmental hazards on these communities (air and water pollution, cancer-causing chemicals, noise, etc.) • These communities already have higher levels of health problems and less access to health care • What can be done about it?