"Tax abatements, low-cost capital, zero-cost grants, paid workforce
training and more will give your business the running start that
puts you ahead of the competition. In southwest North Dakota, we
will be your partners in success."
If you're not paying close attention, you might think you were
reading an advertisement for a bank.
In certain ways, it is a bank ad—the Community Bank of John
Q. Public, as local communities market a variety of subsidies to
lure a new business to town or help an existing one expand. After
the handshake, taxpayers enter the picture because that's ultimately
who's footing the bill.
Neither the competition among governments for economic development
nor the policy discussions it provokes are new. The Minneapolis
Fed, for one, has weighed in repeatedly on the "war among the states"
for big-ticket plant expansions.
But as the saying goes, everything is local, and it is particularly
true for economic development. The biggest business giveaways ever
negotiated by corporate suits still end up in someone's back yard,
and not in someone else's. Somebody got more tax base. Somebody
got more jobs. Somebody won. Somebody lost.
Better than 80 percent of business assistance agreements in Minnesota
were negotiated by cities, largely because cities control land development,
and real estate development remains the birth place of government-induced
economic activity despite the economy's transition to an information
and technology base.
Myriad evidence suggests that public involvement in local economic
development is on the increase throughout the Ninth District. Yet
there is surprisingly little data that might provide a snapshot
of what it all looks like on the ground, how it acts or how pieces
compare with each other. If there is a war going on at the local
level, no one has a clue who's actually winning, how far they're
ahead or why.
Nonetheless, more cities—including many with fewer than 1,000
people—zestfully enter the battle every month, using local,
state and federal tax dollars to leverage subsidy deals for business.
The reason is simple: Do so or forget about businesses coming to
"Tax incentives are taken for granted by clients across the U.S.A.,
as is low-cost or free real estate," said Gaylon Baker, head of
Stark Development Corp. in North Dakota.
"If you don't have the (incentive) fundamentals, you're not in
the game," said John Regetz, executive director of the Chippewa
County (Wis.) Economic Development Corp. Along with abatements and
other common tax subsidies, Regetz said, site selectors for corporations
"routinely" ask for cash incentives as well.
With an annual budget of about $85,000, Cal Klewin is charged
with drumming up economic activity on behalf of the 3,500 residents
of Bowman County, in southwestern North Dakota. This might not seem
like much in the grand scheme of things, but Klewin said it shows
commitment. Local leaders "have got to put some dollars toward the
mission of growth," Klewin said. "If you look dead, you will die."
Many communities appear to agree with that sentiment. "People
are jumping on the bandwagon," said Roger Nacker, director of the
Wisconsin Bureau of Business Development and president of the Wisconsin
Economic Development Association (WEDA). In the last few years,
WEDA membership has roughly doubled to about 500. "Everybody wants
to emulate the success" of other communities, Nacker said. "There
are still a lot of have-nots."
The resulting creep in business subsidies is ringing up a public
tab of unknown proportion. The exact total is difficult to even
estimate, given the fact that there is little centralized reporting
among the expansive web of public, quasi-public and nonprofit organizations
brokering incentive deals on behalf of local communities.
Disparate pieces of evidence gathered in the course of research
for these articles found that public expenditures on business subsidies
(including tax forgiveness or avoidance) reaches hundreds of millions
annually just among states in the Ninth Federal Reserve District.
With more communities offering an ever-widening array of giveaways,
it's a virtual smorgasbord for any expanding company willing and
able to look for the best deal.
Me-too: Local activity on the rise
Larger cities have long been intimately involved in economic development
activities. But smaller cities today appear eager to help bring
jobs to town. Exhibit A is an increase in the number of organizations
whose mission is to enhance the local economy.
Take Minnesota, for example. In 1986, the state passed legislation
allowing cities to create economic development authorities (EDAs)
to encourage and facilitate local business activity. By 1990, a
survey found that a little fewer than 200 cities had EDAs.
A search of an online state database indicates that number has
grown by upwards of 30 percent in the last decade. Maybe more surprising,
it is not uncommon for cities with populations below 1,000 to have
an EDA with a handful of incentive programs ready to go for an interested
business. The city of Verndale, pop. 551, recently created its own
EDA. It has two tax increment financing districts at its disposal
and is committed to "pooling together sources of funding for prospective
In southwestern Minnesota's Renville County, 10 cities with populations
of 450 to 2,600 all have EDAs. Most were created in the early to
mid-1990s to better facilitate economic and housing activities in
each city, according to Julie Rath, director of the Renville County
Economic Development Commission, which helps coordinate activity
among the cities.
That organizational network for local economic development also
extends well beyond city hall. At least two dozen counties in Minnesota
have formal EDAs, and some 40-plus quasi-public and private nonprofit
organizations were identified whose mission involved economic development
on behalf of cities or regions. Even among cities with no formal
EDA, some still manage to have basic business incentives on the
In some states, the network of local development organizations
has been largely in place for years, but has become more active
of late. For example, there are 166 local development corporations
recognized in South Dakota. That number has gone up by not more
than about 10 percent during the last seven years, estimated Connie
Halverson, manager of business and community development for the
Governor's Office of Economic Development.
The Eureka Community Development Corp. (ECDC) in Eureka, S.D.,
has been around since 1960, but "has been very active in the last
10 years," according to Wanda Jundt, the group's secretary. Representing
a city population of just 1,200, ECDC's staff of two part-time employees,
including Jundt, might seem exorbitant. But its size and off-the-beaten-path
location in north-central South Dakota is actually part of the justification
for two paid staff.
"It is hard to find business even interested in looking at our
town, and much harder to convince them to locate here," Jundt said.
In the last year, one new business has come to town, replacing a
company that had moved out of the country.
"The ones we have worked with would not have located in Eureka
without the financial assistance" coordinated through the ECDC,
Jundt said. "With a poor ag economy, these jobs are extremely essential
to the economy of the town."
Montana has a fairly small number of local development organizations—one
source put the number at 60 to 65 groups—but the state is home
to only 50 cities and 78 townships. Local efforts to spur growth
"is probably among the hottest topics in the state now," according
to Tod Kasten, regional development officer for the state's eastern
region. People are looking for ways to increase resources in economic
development, and candidates for elected office are running on "jobs
and income kinds of platforms," Kasten said. "It's highly debated
how to fund such efforts."
Local demand for funding from state programs has also been strong,
according to Gary Morehouse, financial program director with the
Montana Department of Commerce. "The demand is way stronger than
what we have available," Morehouse said. With more groups seeking
assistance from a fairly small pool of state resources, existing
programs "just run out quicker ... the bulk of the money is out
in a couple of months. There is a huge need for more," Morehouse
Last year, the Montana Legislature responded by approving $10
million for a string of new economic development programs. The funding
mechanism—diverting money from an existing coal tax—was
found unconstitutional, and a special session will convene in May
to find an alternative funding source.
Locals set their own table of incentives
Rising interest rates are also fueling inquiries to local, low-cost
loan programs. Evan Barrett, executive director of the Butte (Mont.)
Local Development Corp., (BLDC) said many banks have pushed their
commercial loans to 10 percent or more and BLDC loans "now are becoming
very attractive at 6 percent."
Evidence indicates there are literally hundreds of such low-cost
loan programs in Ninth District communities—BLDC itself administers
six. Most are revolving loan funds, a mechanism whereby businesses
receive loans at below-market interest rates, and subsequent repayments
are then lent or "revolved" to other businesses.
In Minnesota, there were virtually no revolving loan programs
before 1984. By 1989, there were 157; seven years later, the number
had grown to 237, according to a legislative auditor's report. Total
capital in these revolving loan funds more than doubled to $110
million from 1989 to 1996.
In South Dakota, $132 million in capital is available from 84
revolving loan funds through 69 organizations statewide, according
to a joint state report. Three of four loan funds have opened for
business since 1989.
The use of tax increment financing (TIF)—a standby tool for
many communities—is also rising steadily in some states. TIF
allows cities to upgrade infrastructure in designated areas and
use the new or "increment" property taxes to pay the costs.
In Minnesota, for example, TIF is used in more than two of five
business assistance agreements. In 1998, the Department of Revenue
reported that more than 400 TIF authorities (mostly cities) had
over 1,600 revenue-generating TIFs-an increase of more than 100
such districts from just one year earlier. (The Office of the State
Auditor identified over 2,000 total TIF districts in the state in
1998, which included recently established and underperforming TIFs
that generated no increment revenue.)
The city of Spicer, about 100 miles directly west of the Twin
Cities with a population of 1,167, boasts seven TIF districts. It
is hardly alone among small Minnesota cities, as about one of three
cities with a population between 200 and 2,500 reported TIF revenue
Among the 26 Wisconsin counties in the Ninth District, currently
there are 75 cities with 146 tax increment districts. Since 1990,
the area has seen a net creation of 33 new TIF districts.
Along with a traditional TIF program, Montana has a separate TIF
used specifically for industrial development (TIFID). The city of
Butte has 1,300 acres in two TIFIDs, and the program was recently
used to finance $50 million in infrastructure expansion and upgrades
to support a new $500 million expansion by Advanced Silicon Materials,
which will employ 200 people.
"We've been preaching it (TIFID) for 10 years," Barrett said.
"It's just starting to get used."
With different needs in different communities, oftentimes the
most useful tool for local communities—at least those with
resources—is the ability and relative autonomy to customize
an incentive package.
"I think some of the locals (programs) are far more creative"
in designing programs that meet specific needs of the business and
the local community, said Nacker of WEDA. As a result, businesses
can negotiate for a host of local incentives, from site amenities
to buy-downs on land, interest and utility costs, or even lawyer
In Douglas County, Wis., five local development organizations
sponsor an annual "best business plan" contest, with winners receiving
small cash awards and a $5,000 to $10,000 zero-interest loan.
An economic development group in Montana was reported to have
guaranteed a communications company 1,500 lines at $1,000 each to
expand their business in the local community. Commissioners for
Stark County, N.D., rezoned a 41-acre tract and froze property taxes
for five years.
Public and private development corporations in Gogebic County
(U.P.) have underwritten spec buildings with generous lease options
due to a shortage of available industrial and commercial buildings,
according to a local source. Last year, the Pierre (S.D.) Economic
Development Corp. built a 30,000 square-foot facility for $1.2 million,
which it leased to an electronics company.
Grand Forks, N.D., spent $2.25 million to purchase and upgrade
77 acres of land with the hope that Amazon.com would build a new
distribution center on the site. It didn't, and had never really
planned to, according to local reports.
A million pennies
With more cities looking to get their share of the business pie,
getting a handle on what's actually spent or given out in a particular
year is difficult to determine with any certainty.
Minnesota collects far and away the most information regarding
business subsidies. In other Ninth District states, data on local
economic development spending is nothing more than a handful of
disparate facts collected by different agencies.
Minnesota first passed a reporting law in 1995, but later repealed
and replaced it with a tougher law requiring all organizations with
the authority to provide a business subsidy to report any agreements
that were worth more than $25,000 or included TIF. The law remains
one of only two in the country (Maine has the other).
From 1995 to 1998, 123 organizations reported entering into 467
agreements, which rang up a public tab of $138 million last year
alone. Burnsville, a fast-growing suburb in Dakota County, made
45 separate agreements during this period (virtually all of it TIF)
which provided businesses with $15 million in assistance last year.
A pioneering law, it nonetheless provides only a glimpse of what's
given to businesses. For one, the law cannot factor in the ongoing
costs of assistance agreements made before 1995—from which
TIF alone would add a couple of hundred million dollars to last
year's price tag.
Beyond these formal agreements, significant resources also are
spent under the larger umbrella of "economic development." For example,
Minnesota counties spent $80 million on economic development from
1995 to 1998, according to the Office of the State Auditor. Minnesota's
reporting law, however, found that counties made just $1 million
worth of business agreements during this time. Whether the remaining
$79 million was spent on public infrastructure for the benefit of
the larger community is difficult to determine with any certainty.
Examples from other states show that local communities are getting
access to more resources to promote economic development. In North
Dakota, for example, cities are allowed to add up to 1 cent onto
the state's sales tax. One state official said that probably fewer
than 10 cities collected any such sales tax a decade ago. But last
year, 75 cities collected a local sales tax, and better than eight
of 10 dedicated some or all of this revenue specifically to local
economic development, according to figures from the Office of the
State Tax Commissioner.
Minot, N.D., is one of those cities that recently enacted the
local sales tax. Four-tenths of a cent is added to every dollar
of sales in the city and dedicated to economic development activities.
That might not sound like much, but it rings up about $1.7 million
annually for the city, and contributed significantly to a recent
subsidy package of almost $11 million for Northwest Airlines to
relocate its customer service center and 600 jobs from Plymouth,
Cities and counties in North Dakota are also allowed to levy an
additional mil onto property taxes to specifically fund economic
development activities through a joint development authority. Last
year, 20 cities levied the additional tax, although only two generated
more than $10,000. In contrast, 30 counties collected almost $2
million through the additional mil for economic development activities,
with three counties raising over $100,000.
Cities in South Dakota have a similar opportunity to tack on a
local sales tax, and currently 116 communities do so, according
to Halverson, but no one tracks how much the tax generates statewide
or how the money is spent.
Local communities in Montana have two unique tools at their disposal.
One is the ability of cities to create port authorities regardless
of whether there is any port activity. This authority enables communities
to levy an additional two mils onto local property taxes for port
activities, and if there are none, the money can be used for economic
"It's an open door for any local government to use the auspices
of a port to generate money for economic development as long as
they don't have to use it for transportation activities," Barrett
said. To date, the cities of Billings, Great Falls and Kalispell
have levied the two additional mils for this purpose, generating
between $100,000 and $400,000 a year for local economic development
in each city, Barrett said. Ravalli County, located on the western
edge of the state, created the first county port authority last
year, according to Morehouse.
A second law allows cities and counties to levy one mil specifically
to fund economic development efforts—but it must be approved
by voters. In the state's history, voters have approved such a levy
increase only three times, twice in Butte and once in Beaverhead
County, Barrett said.
"It's very difficult to get people to vote for a tax on themselves,"
Barrett said. But a recent change in law gives government bodies
the power to add the mil without constituent approval. The trade-off
is that the mil must be reapproved every year, rather than every
six years if approved through a voter referendum.
Adding it up
With so little comprehensive data available on local economic development
and business subsidies, evaluating the impact of such activities
can be difficult, maybe sometimes conveniently so.
"How do you measure a return on something that doesn't presently
exist?" said Jerry Thomas, head of the Big Sky Economic Development
Authority in Billings, Mont. "The new or expanding business activity
that does generate new taxes on jobs and properties, because of
our incentives, is a new net gain."
Among the two dozen or so local development officials who commented
for this story, few saw the need for rigorous evaluation of business
incentives so long as companies passed a basic smell test for jobs,
which itself can be a moving target.
"The public's return is having jobs locally where they can make
a decent wage with benefits," said Jundt of Eureka.
James Hill, executive director of the La Crosse (Wis.) Area Development
Corp., said performance measures are becoming more prevalent in
incentive deals, but added that "most probably just weigh it on
a situational basis."
"There is no way you can establish cause and effect on these things,"
said Nacker of WEDA. "If it achieves mutual goals (for the company
and community), it serves its purpose."
Several sources admitted that at least some of the private investment
would likely still occur without the assistance. But the subjective
nature of "good vs. bad" investment of public resources makes a
formulaic analysis of such incentives difficult, if not impossible,
according to several officials.
"It's hard to measure (performance). It becomes an awful lot of
gut feeling," said Jack Sroka, executive director of the Barron
County (Wis.) Economic Development Corp. "I don't know that we can
ever get there (having tangible performance criteria). That if it
meets this, this and this, it's good."
Community circumstances have to be considered, which can change
the bottom line of a particular proposal, according to Ron Kraft,
executive director of the Yankton (S.D.) Office of Economic Development.
Suppose, for instance, "your community just lost an employer that
employed 850 people in a rural community. You will do more (to land
a prospective employer) following that hit than you might when all
your employers are growing and hiring," he said. Sroka acknowledged
that in some instances, local officials are enamored with the idea
of simply bringing new jobs to town, regardless of the ultimate
cost. "I think there's a lot of that," Sroka said.
Others agreed. "I do see incentives handed out where the benefits
back to the community are not evident," said Steve King, executive
director of the Dakota County (Minn.) Economic Development Partnership.
Community incentive programs are "all over the map. It's not properly
focused at all," King said. "There isn't someone to help cities
drink from the cup of reason."
Kasten, the Montana regional rep, said some agreements are "dumb-risk
lending" where sometimes "the bottom-line is they don't pay." A
former banker, Kasten said he has sat in on public loan proposals
that didn't make financial sense but were nonetheless approved.
"There is a reason banks are tight with their money," Kasten said.
"You have to be careful you're not buying jobs."
Many incentive deals now come with "clawbacks"—repayment
of subsidies if certain goals aren't met. But there has been little
analysis on the net effect of clawbacks, such as how often clawback
provisions have been triggered and ultimately recouped, or whether
clawback standards are appropriately high, rather than set artificially
low to avoid being triggered.
Here comes the sun?
With a multitude of factors to consider—not the least of which
is a difference of opinion about what constitutes success and failure—public
scrutiny might play an important role in the future popularity of
business incentive agreements.
The intent of the Minnesota reporting law "is to provide some
sunshine" to business assistance agreements, according to Bob Isaacson,
director of the Office of Analysis and Information in the state
Department of Employment and Economic Development (DEED).
"What we're doing is trying to provide some accountability for
taxpayers," Isaacson said. Local communities should be left alone
to set their own subsidy objectives, because they better understand
the unique needs and local context for economic development, Isaacson
said. But some form of standard was also critical, along with the
need to objectively measure performance.
"I think you can measure it (performance)," Isaacson said. "It's
only right as a government office that we seek some kind of return
on investment ... (and) to be sure we're spending tax money wisely."
Widely heralded throughout the country, however, the law has no
regulatory consequences for suspect agreements. Isaacson acknowledged
that neither DEED nor any other state department had much recourse
for cities entering into suspect agreements. "They can do whatever
they want, in reality."
As a result, the law's only real leverage is through public scrutiny.
Along with an annual report on the number and type of agreements
entered, the law requires public hearings prior to any final contract.
Unfortunately, the public's interest in these hearings to date has
been minimal, Isaacson said.
"There's a lot of sunshine, but I'm wondering how many people
seek the sunshine," Isaacson said. "I'm not seeing the interest
in it I'd like to see. ... They (citizens) don't take the time to
find out where tax money is going."
One of the reasons might be that local citizens simply want to
see their communities grow, and don't care to consider wonkish cost-benefit
analyses, or the larger effects of communities battling each other
for economic growth.
When residents "see people moving into this area to fill jobs
that are created by new businesses and existing businesses, they
are happy. They are not really concerned with the fact that this
growth could have occurred in some other area of the country and
the net effect on the (gross national product) for the country would
be the same," said Dan Scott, president of the Sioux Falls (S.D.)
So many communities see the apparent rewards of business assistance
programs that "the marketplace has evolved to include incentives,"
according to Jerry Murphy, head of the Gogebic County (U.P.) Economic
Incentives by themselves rarely make or break a deal, "but they
can eliminate contending locations from the competition if they
are not in balance" with the rest of the market, Murphy said. "Attempting
to reverse that trend with national or international economic logic
is an interesting debate for economists, but hardly practical at
a community level."
For more information on the Minneapolis Fed's
work on this issue, see Arthur Rolnick and Melvin Burstein, "Congress
Should End the Economic War Among the States", The Region,
March 1995; see also a special June 1996 issue of The Region
that reported on the proceedings of "The
Economic War Among the States," a conference held in Washington,
D.C., on May 21-22, 1996. Other resources on this topic can be found
at Special Studies: The Economic War Among the States.