What a Community Can Do to Promote Its Economic Growth
In a very general way, there are four major things a community can do to facilitate its own economic growth. As will become apparent, there is a certain amount of overlap among them.
Sales and Promotion. The community can engage in a variety of public relations, advertising, selling, and marketing efforts. In effect, it can view itself as a product and then make a concerted effort to sell that "product." For a firm seeking a location, there is no feasible way to gather objective information about all the possibilities. The community that makes itself highly visible thus gives itself an advantage.
Subsidization. The community can subsidize development in a variety of ways. One form is tax abatement. Since the main tax used by local government is the property tax, abatement most commonly takes the form of reduced property taxes for new commercial or industrial development. Some communities will set up revolving loan funds or other credit-granting arrangements to facilitate business growth. If the municipality levies sales, inventory, commercial occupancy, or business taxes, it may offer reductions in these.
The Enterprise Zone is a variation on this theme. The city, town, county, or state designates an area as an Enterprise Zone. Within this zone a variety of tax breaks are offered for new investment. These may include property tax reductions, sales tax reductions, reduced corporate income tax, and so on. In addition, direct grants may be offered. Another inducement may be the waiving of some land-use regulations to permit higher densities. The technique has most commonly been used in the attempt to restore deteriorated central-city areas.
The use of municipal funds for subsidies, whether through direct expenditure or through the tax expenditure route such as a property tax abatement, has some inherent problems. If the municipality gives assistance to one firm, it has to find the money to do so. If that pushes up its tax rate, it has simultaneously made itself more attractive to one firm but less attractive to every other firm. The question is: which effect predominates? That is not always easy to decide.
Subsidizing is bedeviled with the matter of information asymmetry. In the ideal case a subsidy would be given only if it were decisive. If the firm were going to invest in the community in any case, then the subsidy is just a windfall to the firm and serves no community purpose. Assuming that the subsidy is decisive, the subsidy should be exactly the minimum size to get the firm to do what the municipality wants it to do. Any money beyond that minimum amount is also a windfall. Determining whether the subsidy is decisive and whether, if so, it is the minimum amount necessary is no easy matter. It is in the interest of the firm to get as big a subsidy as possible, and so the firm will take the position that of course it is necessary and it has to be very large. The firm knows its own motivations and, if it has been shopping for a new location, what offers are available from other places. But this information is generally not available to the municipality or its economic development agency. The firm reveals what it chooses to reveal. On the other hand, the municipality and its development agency as public bodies have to operate in a relatively open manner. In effect, it is a poker game in which one player is allowed to hold his cards close to his chest and the other has to play with his cards face up on the table. The chance that the municipality will get the offer just right is small.
That firms have the capacity to play off one community or state against another by saying, in effect, "if you don't, somebody else will" is beyond doubt. For several years the State of Maryland has been trying to promote itself as a site for movie and TV production. One show that has received a substantial subsidy from Maryland has been the popular House of Cards. In February 2014, the Washington Post reported that an official of Media Rights Capital, the firm that produces the show, had written to Martin O'Malley, the Governor of Maryland:
I wanted you to be aware that we are required to look at other states in which to film on the off-chance that the legislation [tax credits for the next season of the show] does not pass or does not cover the amount of tax credits for which we would qualify.8
There is nothing subtle about that.
There is also the question of what happens when the municipality puts subsidy money up front and then, for whatever reason, things do not work out as planned. Many municipalities include clawback provisions in contracts with firms for which subsidies are provided. These require repayment by the firm if it fails to make specified benchmarks for investment or employment. Sometimes these provisions work and sometimes they don't. If the firm goes bankrupt they often don't. The municipality is, in effect, standing in line with all the firm's other creditors at the bankruptcy proceedings and may get back only pennies on the dollar.9
Special Small Area Finance Arrangements. There are a variety of arrangements a municipality may use to direct funding to the economic development of selected areas when that suits its larger economic development strategy. One is tax increment financing (TIF). Here the increase in property tax revenues resulting from new development in the area is reserved for reinvestment in that area. A related device is the business investment district (BID). Here, property owners within the district are charged a surtax above the prevailing property tax rate, with that surcharge dedicated to investment within the district. The BID surcharge may be politically acceptable even in a generally anti-tax environment because the link between who pays and who benefits is so clear.
Making Sites and Buildings Available. Availability of sites or buildings is a key factor in determining whether a community can attract new commercial activity and retain existing activity. What constitutes a usable site? Consider a planning agency in a suburban or metropolitan fringe area setting up preliminary criteria for identifying potential industrial or commercial land. A first cut might be to rule out any land with a slope of more than 5 percent, as steep slopes push up site-preparation and construction costs. Subsoil conditions such as drainage problems or rock outcroppings that add to construction costs might be a second cut. If the municipality is traversed by a river or stream, land in the flood plain might also be eliminated from consideration. Availability of utilities such as water, sewers, and electric power is also a criterion. For light manufacturing, retailing, wholesaling, and office activities, adequate road access would also be a requirement. For heavy manufacturing, rail access as well is likely to be needed. In addition to having an adequate number of acres available, there is also the matter of site geometry. For heavy industry, a minimum site depth of 800 feet might be a good rule of thumb. For light manufacturing, minimum depths of 400 to 600 feet are desirable.
To ensure that adequate sites will be available in the foreseeable future, there are various steps a municipality can take. The most direct step is the public provision of sites. Numerous cities, towns, and counties have municipal industrial parks. The community uses public funds (and sometimes the power of eminent domain as well) to acquire and develop sites. The prepared sites are then sold or leased long term to firms, which erect and operate manufacturing or other commercial buildings on them. Very often, there is a significant public subsidy in such operations in that the rent or sales price covers only a fraction of the costs incurred in site acquisition, grading, drainage, building of access roads, running water and sewer lines, and so on.
Some communities will go even further by erecting a building and then seeking a firm or firms to occupy it. Very often the structure put up is a shell building. The community puts up the outer shell of the building and then waits until it has found a firm to use the building before it completes the interior. Again, there may or may not be an element of subsidy in the process. In either case, the community bears the risk, namely that the building will not sell or rent.
Another community might take a somewhat more tentative approach and engage in land banking; that is, acquiring land or perhaps options on land with a view simply to hold it as a potential commercial site. Of course, such a method is expensive. The financial cost to the community is the loss of interest on whatever funds are tied up in the land. If the community sinks $1 million into land banking and the current rate at which the community borrows is 5 percent, the carrying cost is $50,000 for that year, a burden that must be borne by the municipality's taxpayers.
In most cases the provision of sites means something like a few acres in a municipally owned industrial park or perhaps floor space in a shell building. But occasionally it means something much larger. Several years ago New York City offered a site on Roosevelt Island (a long, narrow island in the East River alongside Manhattan) and $100 million in site improvements and put the package out to bid. The winner of the competition was a consortium of Cornell University and the Technion Institute of Haifa, Israel. The result, announced in December 2011, will be an engineering school, Cornell NYC Tech. The city will gain an estimated 600 on-site jobs but, more importantly, it sees the school as a catalyst for the city's growing presence in high-tech industry.
Incubator Buildings. Many economic development programs try to foster small-business development through the use of incubator buildings. This is a building that provides space for business start-ups. The idea is to reduce costs by use of shared facilities and in some cases also by some degree of subsidy if that space is rented to firms at below cost. The economic development agency may also provide technical assistance for beginning entrepreneurs, perhaps by arranging mentoring relationships with other businesspeople in the community.
Revolving Loan Funds. The revolving loan fund starts with a block of capital either from public or local business sources and uses it to make small loans to small local businesses. As those loans are repaid, funds become available for additional loans: There may or may not be some subsidy in the form of a reduced interest rate. Such funds, because their goal is community development rather than profit, are generally willing to make some loans that a commercial lender would not. A revolving loan fund might also help firms by offering loan guarantees so that they can obtain commercial credit. At this time when many banks are feeling especially cautious and many small businesses find it hard to borrow money, such funds might have an expanded role—provided, of course, that they are able to raise sufficient capital.
Use of Land-Use Controls and Provision of Infrastructure. Beyond the direct provision of land, the community can use its land-use control powers to ensure that adequate privately owned land will be available for commercial development. One obvious step is simply zoning an adequate amount of land in the appropriate categories. The zoning should be applied to land that actually has real development potential, land that meets the sorts of topographic and geometric standards previously described. It also means land that either already has been or has the potential for being provided with adequate access and utilities. As noted in Chapter 8, the zoning should be coordinated with the land uses shown on the comprehensive plan.
The infrastructure question is addressed through the community's capital budget. For sites with near-term development potential, capital funds can be spent to provide utilities and access. For sites with longer term potential, it is hard to justify immediate expenditure. However, providing infrastructure to these sites can be an item on the community's capital improvements program scheduled for some years hence.
None of these measures will guarantee that a given parcel of land will be used for commercial or industrial use or that it will not be put to some other use. However, by declaring its intent through master planning, zoning, and capital budgeting, the community decreases the odds that lands with economic potential will be pre-empted by other uses. Assume that a block of 100 acres has good potential for economic development in the long term but that its chances for such development in the next few years are small. The owner has the chance to sell five acres out of its center for residential use now. However, dividing the site in that manner will greatly reduce its ultimate commercial or industrial potential. By telegraphing its long-term intentions as described, the community encourages the property owner to take a long-term rather than a short-term view of the situation.