"No Catch! 72 acres of industrial tax-free land is available
That's the pitch in Ontonagon County in the Upper Peninsula (U.P.)
of Michigan, where two parcels of land have been designated as virtually
tax-free shelters for the next decade for any business willing to
create 25 jobs there through a state program called Renaissance
Established in law three years ago to address economically distressed
areas of the state, renaissance zones waive almost all state and
local taxes on a Michigan business, including the single business
tax, state and local income taxes, state education tax, local property
taxes and utility user tax. The state originally designated four
other sites in the U.P. in nearby Gogebic and Houghton counties
and created an additional zone at the former Sawyer Air Force Base
in Marquette County this past December. Combined, the seven sites
encompass more than 3,300 industrial acres.
Other states are following that lead. Last year, the North Dakota
Legislature approved its own Renaissance Zone initiative, modeling
it after Michigan, according to a state official there. Earlier
this year, Fargo became the first designated zone, while several
other cities are preparing applications. Minnesota's new Enterprise
Zone Program offers more modest tax credits to businesses that create
or retain jobs in the cities of Breckenridge, Dilworth, East Grand
Forks, Moorhead, Ortonville and Duluth.
While each program has its unique features, each demonstrates
the considerable influence of the state on local business subsidies.
Federal resources also provide a helping hand.
In fact, local economic development tends to be a bit like stone
soupit doesn't need much to get off the ground. Just a few
state loans here, a little block grant money there, maybe a pinch
of federal assistanceand before you know it, two new companies
have come to town. And it was so easy.
That's not to say there are no local resources involved, or to
diminish the local role of marketing, negotiating and closing business
assistance deals-no easy task considering the tangle of state and
federal programs and related regulations. But without this hopper
of nonlocal resources, many local business subsidy deals would never
He ain't heavy, he's my (Big) Brother
In many cases, state and federal resources are used for public
infrastructure projectsthe roads and sewers necessary for
a business to even consider locating in a particular city. Such
assistance can hardly be labeled a business subsidy, but it does
tend to lay the groundwork for local deals with businesses.
Through a number of vehicles, however, states also provide the
actual subsidy to help close a deal for a local community. Last
year, the Wisconsin Department of Commerce provided $42 million
in grants and loans to more than 400 businesses, according to a
department official. It also recently announced a new $9 million
program with three financing programs "to help diversify the business
base in local communities."
Minnesota budgeted $27 million this year for three of its largest
assistance programsthe Minnesota Investment Fund, Job Skills
Partnership and Small Business Development Loan Programaccording
to an official with the state Department of Employment and Economic Development
At the federal level, agencies with some involvement in local
economic development include the Economic Development Administration
(EDA), the U.S. Department of Agriculture's (USDA) Rural Development,
the Department of Housing and Urban Development (HUD) and the Small
Business Administration (SBA). Distinguishing public infrastructure
investments from outright business subsidies at this level can be
difficult. But at the very least, federal business loan programs
further supplement an extensive low-cost (sometimes no-cost) financing
According to a recent DEED report, about 240 Minnesota businesses
took advantage of the SBA's 504 loan program and the Small Business
Investment Companies program in 1997. Combined, these loans were
worth almost $145 million.
Montana, with a smaller network of local organizations, and a
small, widely dispersed population, depends heavily on state and
federal resources to assist local business development. Through
the state's Small Business Development Centers, 217 small companies
received over $25 million in 1998, most of which came from the federal
Much of the money that states spend on economic development is
pass-through money from federal sources. Montana received about
$8 million in funding from HUD last year, one-third of which went
to cities in the form of block grants for economic development,
which typically end up as low-cost loans to local businesses.
Many local economic development professionals recognize the importance
of state and federal programs in local assistance deals. Many admitted
that their options would be limiteddramatically in some casesif
state and federal business assistance programs disappeared.
"We could not compete with larger communities that have the ability
to throw more money at a project," said Ron Zeigler, executive director
of the Lake City (Minn.) Economic Development Authority.
John Regetz, head of the Chippewa County (Wis.) Economic Development
Corp., agreed. "Without state (and) federal funds we could not do
the retention-expansion projects that we have (for) loyal local
companies that needed help."
Other practitioners mentioned that local efforts could get by
on local revolving loan funds and tax increment financing, which
are used extensively throughout the Ninth District. But even here,
state and federal governments play a significant role. For example,
at least 80 revolving loan funds have been created in the Ninth
District through the federal EDA and the USDA's Intermediary Relending
Program, according to a source with the research arm of the National
Association of Development Organizations.
A state report published last year found that an estimated 80
percent of the capital in all South Dakota revolving loan funds
comes from state and federal sources. Businesses receiving loans
through the Minnesota Investment Fund repay the first $100,000 to
the local community where the business resides, which the city then
typically uses as start-up or add-on capital for a local revolving
loan fund. Block grants to Montana cities are used in a similar
Even tax increment financing (TIF)the king of local development
tools in Minnesota and Wisconsingets important, if indirect,
support from the state and other local taxing districts. In a nutshell,
TIF is intended to allow cities to invest in infrastructure improvements
in designated areas to attract new development. As the property
value of businesses located in a TIF district increases, the "new"
taxes generated by the value increase go to the city to pay the
capital improvement costs.
Until this infrastructure debt is repaidwhich can take up
to 25 yearsTIF requires the local school district, county
and other property-based taxing districts to forgo any additional
tax revenue that they would have otherwise received from the new
development, were it not for the TIF. Coming full circle, when budgets
for local taxing districts increase, the state (through such things
as education aid and local government aid) helps fill the gap left
by taxes that were redirected to pay TIF obligations.
It might be confusing and arcane, but it's serious money for local
economic development. In Minnesota, for example, multiply that example
times the 1,600-odd TIF districts in the state that generated tax
increments in 1998, and the result is close to $300 million in taxes
that are redirected to pay off municipal bonds rather than going
to the general funds of various taxing bodies.
There is also a disconnect between the intent and the practice
of TIF. Designed to finance public infrastructure investments, only
a small portion of TIF expenditures is used toward this goal, and
most of the financial benefits accrue to a small handful of businesses,
according to information reported to the Minnesota Office of the
State Auditor (OSA).
For example, TIF districts in Minnesota incurred costs of $410
million in 1998 (not including $232 million worth of debt payments
from TIF projects of previous years), according to the OSA. Of this
total, less than 10 percent ($35 million) went for the construction
of public utilities, roads or sidewalks. Almost $71 million went
for land and building acquisition, which are typically resold below
market value to the incoming business, according to one state expert
who wished not to be identified. Another $26 million went to pay
for parking facilitiesa common feature in urban TIF projectsand
$48 million went for site improvements, much of which a business
would assume if developing outside a TIF district.
Maybe most interesting, another $70 million in TIF expenditures
is simply categorized by state statute as "other," and generally
considered to be direct business subsidies of one form or another,
the state expert said.
A level playing field?
Although smaller towns have access to common economic development
tools, that does not mean there is a level playing field, particularly
when it comes to federal or state resources, several sources said.
Smaller communities have to contend with the fact that metropolitan
areas like the Twin Cities typically receive more federal entitlement
money, Regetz said. This can have a perverse effect, as local communities
spend more on business incentives than they otherwise might. "If
they (metro areas) had to come up with their own dollars, or compete
for them, they would probably be more judicious," Regetz said.
Chippewa Falls County recently received a nonentitlement HUD grant
of $875,000 to develop a 400-acre business park in the city of Chippewa
Falls (pop. 13,000). It was the first such HUD grant for the county
in probably 20 years, Regetz said, and was largely the doing of
Rep. David Obey.
"We have been fortunate to have a strong representative in the
U.S. House and capable staff to acquire nonentitlement federal funds,
but many small communities are not so lucky," Regetz said.
As a result, "smaller communities that need assistance the most
don't get more help," he said. "It's an unfair world, but readjusting
the system to serve its original intent would be a better solution
than eliminating the idea of helping deprived communities. Maybe
putting the states in charge of the entitlement funds would help."