Prologue
The year is 1973. The Chrysler Corporation desires to
rehabilitate its Mack Street Stamping Plant in the City of Detroit. The corporation thought that it would
spend $50 million (in 1973 dollars) for the plant upgrade, but suddenly
declares that it needs government assistance in order to make the central-city
project feasible. Five thousand
employees currently are employed in the plant. Chrysler officials meet with representatives from the City
of Detroit and explain their rehabilitation plans and remind them of their
large employment base. The
corporation then inquires as to whether the city can offer assistance in regard
to keeping this large number of jobs within the city’s limits. Detroit’s policymakers, who since the
1960’s have faced an ever-declining population and manufacturing base, wish to
do all they can to retain the 5,000 jobs.
Officials from the city
believe that if they could reduce the burden of the city’s high rate of
property taxation, Chrysler would have the assistance that it claims to need to
accomplish the plant renovation. At
the time state law offered the city no authority to discretely reduce one
firm’s property tax payments.
Officials from the City of Detroit approach the State of Michigan and
discussions ensue between representatives from the central city, auto
manufacturer, and state.
Discussions produce a draft of a bill that is introduced into the
legislature in early 1974 by a representative from Detroit. The appropriate committees in
Michigan’s Legislature review the proposed bill and make only minor amendments. There is little opposition to the concept
of granting cities the authority to grant property tax abatements to retain
employment. The legislation passes
the House without a single dissenting vote and on July 9, 1974, Public Act 198
(Plant Rehabilitation and Industrial development Districts Act) is signed into
law. The act addresses the
specific situation facing the City of Detroit and the Chrysler Corporation, but
does not limit the offering of property tax abatements to only Michigan’s
largest city.
By
the late 1970s other cities, villages, and townships in metropolitan Detroit
and across the State of Michigan use the authority granted by PA198 to provide
local property tax abatements to manufacturing firms wishing to locate new
facilities in their jurisdiction or to rehabilitate existing facilities. Michigan is not the only state to allow
local property tax abatements.
Other states grant similar authority to their local governments and
property tax abatements come to be viewed as an important and even necessary
element in the package of local incentives offered to attract new firms or
retain existing firms.
Meanwhile,
a nearly unnoticed irony develops in Michigan. In the spring of 1980 the Mack Street Plant closes as part
of the massive federal government bailout of the Chrysler Corporation. A combination of economic forces
including foreign competition and a failure to produce fuel efficient vehicles
during a time of rapidly rising gasoline prices overwhelmed the benefits
received from the city’s property tax abatements. Despite the generous economic development package put
together by the city, the plant closed and the 5,000 jobs were lost.
This
is part of the historical backdrop against which we ask the major questions
raised in this monograph: How effective are local incentives in a metropolitan
environment? Do they succeed in
attracting and retaining jobs? Or,
are they simply corporate welfare?
It
is next to impossible to get reliable information on the degree to which
incentives are being offered by each local government in a state. Even so, anecdotal observation, the
scattered research on local incentives that have been conducted, and the
limited data available all point to the increased use of local incentives in
the United States. The experience
of cities in metropolitan Detroit in regard to local incentive use is not
unique. What is unique about the
Detroit metropolitan area is how early it became involved in the incentive
game, the variety of local incentives available, and the extent to which these
incentives are used. All of these
factors make the Detroit area an appropriate laboratory in which to examine the
ability of local incentives to redirect economic and employment activity in a
metropolitan area.
- 1 -
Local Economic Development
Incentives in the United States
The jury is still out on
whether economic development policies have any effect at all
(McGuire, p. 147, 1992).
One of the most important
policy issues facing major metropolitan areas in the United States now, and for
at least the past three decades, is economic development. The overall distribution of business
activity within a metropolitan area, the retention of existing economic
activity, and the attraction of new economic activity to central cities and
inner suburbs, are all of concern.
The concern stems from the relationships that exist between many of the
most pressing urban problems: crime, poverty, unemployment, blight,
deteriorating infrastructure, fiscal stress, etc., and the continued
redistribution of employment and residence from central cities and inner
suburbs to outer suburbs and rural areas.[1][1]
Redistribution of economic activity within most metropolitan areas has
also created the labor market issue of a spatial mismatch between
low-skilled employees residing in central cities and inner suburbs, and
potential employers located increasingly farther out in urban areas.
Policymakers
of affected cities have not been content to let this redistribution of economic
activity go uncontested and have responded with a host of incentives designed
to alter the location decisions of business. Local business incentives have taken a number of forms: tax
forgiveness, tax increment financing, industrial development bonds, municipal
land acquisition, establishment of development authorities and zones, and other
related activities.[1][2] Since the 1970’s the use of such locally initiated
incentives has increased dramatically throughout the United States. While most of these incentives are
aimed at lowering the cost of business capital within a specific jurisdiction,
they are also offered in a desire to increase employment opportunities for city
residents. After all, who has not
heard the three reasons most often cited by politicians to justify a local
economic development incentive program: jobs, jobs, and jobs.
Bartik (1991b and 1994) has
offered an equity and efficiency based argument in favor of local incentives to business. The equity side of his argument is
based on business location responses to intra-metropolitan tax differentials
that impose greater costs on some communities. Due to high property taxation and inadequate business
services, many firms choose not to locate in a community that is also likely to
have a greater number of poor within its boundaries. The result is a higher level of local taxes paid by the
poor, a lower level of local public services provided to the poor, and reduced
employment opportunities for those who need them most. An offering of local development
incentives may counteract this regressive chain of events.
The efficiency side of
Bartik’s argument is the use of local economic incentives to correct the market
failure of an additional local job being mispriced in a city
experiencing high unemployment. In
a perfectly efficient world a worker in any city is paid a wage equal to the
value they place on alternative uses of their time. In this efficient world an additional job generates local
tax revenue equivalent to the increase in local public services that accompany
the new job. Bartik argues that in
the real world, cities that have high unemployment may enjoy greater social
benefits from an additional local job than cities with low unemployment. High unemployment cities are also more
likely to have underused public infrastructure and services. An additional job poses little
additional public cost to such a city.
Bartik argues that a local incentive that redirects a job from a low
unemployment city to a high unemployment city is efficient in the sense of
correcting the mispriced market signal that exists without it.
As
states have provided their local governments with the ability to grant economic
development incentives, local tax revenue has been foregone in an effort to
attract business capital and employment.
Success in the use of development incentives could be defined as
directing economic development to areas where it would not have occurred but
for the incentives. If local
incentives achieve this goal, the foregone revenue may well be justified. If not, communities have simply given
away tax revenue to the benefit of the business recipients’ bottom line. Furthermore, if such inducements have
become the primary way that communities compete with one another to attract
capital and employment--as is more likely to be the case within a metropolitan
area--it is appropriate to ask whether such competition is good public
policy. It may be quite reasonable
from the point of view of policymakers in one community to grant a tax
incentive in hopes of attracting productive capital and employment within its
boundaries. But if all other
communities in the region grant the same exact tax incentive there is no
redirection of business activity.
This
monograph is a detailed examination of the use and effectiveness of local
economic development incentives within a region or metropolitan area. Our analysis focuses on an important
and large U.S. metropolitan area, the Detroit metropolitan area. We have chosen this area because for
over twenty years the Detroit area has grappled with the use of a wide array of
local economic development incentives. Metropolitan Detroit provides a rich
laboratory in which to investigate the adoption, use, and effectiveness of
local economic development incentives.
Our experience in conducting research on urban fiscal issues leads us to
believe that our methodology, findings, and policy suggestions are relevant to
other U.S. metropolitan areas as well.
Our goal is to enrich the
public policy debate on the degree to which local economic development
incentives have helped create economic opportunities in cities where they would
not have otherwise existed. We are
also interested in revealing the factors that drive one city to offer more of a
particular form of local economic development incentive than what another city
is offering. The intended audience
for this monograph is educated laypersons, policymakers, and researchers. We employ the appropriate economic
theory and statistical methods, but place particularly technical procedures in
appendices so that the body of the monograph is accessible to the
non-technician. We have structured
this study to emphasize clear policy appraisals and recommendations. If one is not particularly interested
in a detailed account of earlier research on local economic development incentives
and spatial mismatch, we recommend that Chapter 2 be skipped or just briefly
looked over.
As
readers of policy tracts ourselves, we have always found it enticing to sample
major findings without having to plow through an entire book. For the Detroit metropolitan area we
find that the offering of most local economic development incentives (holding
all else constant) has increased over time. A city offering more of one type of a local economic
development incentive is also more likely to offer more of other types of local
incentives. We find little
evidence to support the notion that increased manufacturing or commercial
property value in a city in a metropolitan area (holding all else constant),
increases the employment rate of residents in a city. But we do find evidence that increased manufacturing or
commercial property value in a city decreases the percentage of the city’s
residents that live in poverty. If
increased manufacturing or commercial property reduces a city’s poverty rate,
then perhaps a local economic development incentive that increases
non-residential property value can be used to counteract spatial mismatch and
decrease local poverty. We do in
fact find that the establishment of a tax increment finance or downtown
development authority district in the average city in the Detroit area in any
of the observed years increased the commercial value of property in the
city. In addition, the granting of
property tax abatements to manufacturing property prior to 1977 exerted a
positive influence on local manufacturing property value. The use of manufacturing property tax
abatements in other years; and industrial development bonds and commercial
property tax abatements in any year; exerted no positive influence on local
non-residential property values.
Details and policy implications associated with these broad findings are
what the remainder of this book is about.
The
next section of this introductory chapter contains a brief background on
economic development incentives in the United States. In this section we only review local incentives that are
designed to reduce the cost of doing business in a city. We do not review local
activities designed to increase the human capital of a city’s residents,
regenerate mature industries, and/or apply new technology. These tools of economic development are
not the focus of the book.[1][3] The remainder of this chapter also contains a discussion of
why intra-regional local incentive offers merit independent study, evidence on
the intra-regional use of incentives in the U.S. and metropolitan Detroit, and
an outline of the contents of remaining chapters.
U.S. Economic Development Incentives
The widespread use of direct financial incentives by
the states demonstrates the degree
to which they have become partners with private
business in the development process
(NASDA.,
p. 3, 1991).
Although
the active use of state-sanctioned incentives to attract economic development
began in the mid 1970s, local governments have always devoted a portion of
their borrowing ability and infrastructure expenditure to activities that
benefit business.[1][4] Early activity of this type was primarily directed to
accommodating the growth of population into undeveloped areas and facilitating
the commerce that followed.
By
creating the Balance Agriculture with Industry Program in 1936,
Mississippi was the first state to attempt to actively encourage private
industrial development through publicly sanctioned activity. The incentive employed was the issuance
of industrial development bonds (IDBs).
A state or local government issues the IDBs, but the revenue stream of
the private project backs the bonds.
This arrangement takes advantage of the tax-exempt status granted
municipal debt. Although initially
challenged in courts, IDBs have been upheld as a constitutionally appropriate
activity. By the 1960’s most
states had authorized the use of industrial development bonds in some form to
attract business investment. Since
1968, Congress has increasingly placed restrictions on the ability of state and
local governments to issue private purpose IDBs. In response, a few states in the late 1980s allowed the
state issue of taxable industrial development bonds.[1][5] In 1991,
Mississippi and South Carolina were the only states that recognized the local
issue of a taxable bond backed by the assets of a private endeavor.
The
options available to states for the inducement of economic development in 1991
had grown to the list provided in Table 1. In addition to industrial revenue bonds, three states
(Louisiana, North Dakota, and Tennessee) allowed the use of general obligation bonds
by local governments to finance private industrial development. The full faith and credit of the
issuing government backs general obligation bonds. In Michigan this form of municipal bond can only be
used for state-sanctioned private projects. General obligation bonds issued by governments for private
purposes have primarily been used by communities desiring to establish a
labor-intensive manufacturing base, or as in the case of Michigan to retain
large manufacturers.
Table 1.1
Menu of Incentives Offered
Within the United States
Manufacturing Revenue Bonds (Tax Exempt)
Manufacturing Revenue Bonds (Taxable)
General Obligation Bonds
Umbrella Bonds
Manufacturing Revenue Bond Guarantees
Direct State Loans
Loan Guarantees
State-Funded Interest Subsidies
State-Funded Equity/Venture Capital Corporations
Privately Sponsored Development Credit Corporations
Customized Manufacturing Training
Tax Incentives
Enterprise Zones
Source: NASDA (1983 and 1991).
To facilitate the attraction
and retention of small businesses, in 1991 nine states used an umbrella,
or composite issue of one industrial development bond. The proceeds of such an issue are used
by the state to meet the financing needs of more than one enterprise. Another bond innovation was the
guarantee by six states to pay outstanding principal and interest on bond
issues in case of default. To
address constitutional issues raised by this backing, the full faith and credit
of the state is not committed to the guarantee. A separate reserve account is instead established.
According
to the National Association of State Development Agencies (1991), second to
industrial development bonds in terms of the number of states that allow them
are direct loans or grants by a state or local government. Similar to a private loan, an
application and independent evaluation are required. In the twenty-four states that facilitate economic activity
this way, fund sources include the umbrella issue of an industrial development
bond, a one-time appropriation from the state general fund, or a revolving fund
in which new loans are funding through prior loan repayments. A similar business incentive was
created in the twenty states that choose to guarantee private loans or offer
interest subsidies.
Start-up companies have a
greater risk associated with achieving success, but also offer the prospect of
greater employment opportunities.
As a result eighteen states in 1991 had established state-funded or state-chartered
equity/venture capital corporations.
In addition, ten states had created privately sponsored credit
corporations that assist small businesses. Though most of the funding for credit corporations is from
private sources, they are authorized by state legislation and follow state
guidelines.
In
one way or another, the previous incentive programs are all geared to attract
economic development to a state by reducing the business cost of machinery,
buildings, and land. As a result
of the increasing sophistication required of labor in most current production
processes, forty-five states have also designed state-run manufacturing
training programs as a way to recruit new manufacturing activity. Criteria for eligibility for most of
these programs require that employees volunteer and the employer has job
openings of the type sought by the newly trained.
The
most direct method by which a state reduces the cost of doing business within
its boundaries is through a tax incentive. In the United States these have taken the form of tax
exemptions, credits, abatements, and special treatments. In 1991 every state in the Union had
the option of providing relief from at least one of its major taxes. For example, thirty-four states provide
that the inventory held by a business can be at least partially exempt from
property taxation. Minnesota,
North Dakota, and New Jersey also offer some form of exemption or credit toward
the state corporate income tax.
Efforts to conserve energy are granted special tax treatment in
twenty-seven states, while thirty-eight states offer preferable tax treatment
for pollution control equipment. A
state-based investment tax credit exists in at least twenty-five states. The same number of states offers a
business tax credit or exemption for new job creation.
Local governments could
abate or exempt business property from taxation in thirty-three states by
1991. State and/or local
governments could also exempt a business from sales and use taxes in Illinois,
Minnesota, and New Jersey. Another
form of tax incentive, begun in California in 1952, is the establishment of a
tax increment financing authority (TIFA).
An authority is established and a specific zone within the community is
designated where incremental property tax revenue attributed to the development
activity of the authority is used to fund the purchase and maintenance of the
zone’s infrastructure. Sometimes
the authority also sets up an economic development program office as well. The stated goal of a TIFA is increased
economic development within a designated geographic area of a community. Huddleston (1984) noted that at least
twenty-eight states in 1982 allowed cities to establish their own TIFAs. Chapman (1996) recorded more recently
that at least forty-four states and nearly 5,500 local agencies now use this tool
to encourage local economic development.
The
final form of direct business incentive offered by states is the enterprise
zone (EZ). This incentive targets
activity in designated areas of a state.
These incentives are usually restricted to areas that have had a slow
rate of development, high unemployment, and/or high welfare payments per
capita. Tax concessions, tax
credits, employee training programs, and/or the relaxation of environmental or
workplace rules are offered to businesses choosing to locate within these
zones. In 1991, the National
Association of Development Agencies (NASDA) reported that twenty-eight states
had created enterprise zones of some sort. Subsequently, Ladd (1993) reports that thirty-seven states
plus the District of Columbia had formed enterprise zones.
Our
focus is on local government incentives offered within a specified sub-state
region. Of the menu of available
incentives offered in the states in Table 1.1, only a few are under the
autonomous control of local governments.
These include the issuance of local manufacturing revenue bonds, the
issuance of local general obligation bonds, the abatement and exemption of
local property taxes or sales/use taxes, and the establishment of tax increment
finance authorities. In most
cases, the offering of a local incentive is also subject to approval of the
state as well. Even in the absence
of specific state approval, states still have a constitutional right to
intervene and restrict the offering of local incentives by communities that
abuse the practice. Considering
the anecdotal evidence observed in Michigan and other states, in most cases the
approval of a local incentive by a state agency is a rubber-stamp
process. This is not surprising
given the strong tradition of local autonomy and home rule that exists in the
United States.
insert Figure 1.1
approximately here
As
a final piece of background on the use of local incentives in the United
States, Figure 1.1 shows the number of states that allowed six specific types
of incentive programs in 1983, 1986, and 1991. These years were chosen because they correspond to the
published dates for the NASDA Directory of Incentives for Business
Investment and Development in the United States. This directory offers the only known reliable source on the
use of economic development incentives in the entire country. Notice that by 1983 the use of taxable
industrial development bonds, general obligation bonds, and property tax or
sales/use tax exemptions had become well established. There was little or no growth in the use of these local
incentives by additional states through the early 1990s. The innovation of taxable industrial
development bonds only began in the late 1980s. Though enterprise zones in the United States are not a
locally controlled incentive, they are also shown in Figure 1.1 to document
their recent rapid rise in popularity.
This increase in use is spoken about in our final policy suggestions.
Differences in Local
Incentive Offers
[Economic development] programs aimed at individual
towns or suburbs within a
metropolitan area raise different issues (Bartik, p.
2, 1991a).
In Who Benefits from
State and Local Economic Development Policies? (1991a), Bartik concludes
that state and local economic development incentives may increase
productivity, redistribute jobs to areas in most need of employment, and
increase national employment. He
makes this claim based a summary of previous research and his own study of sub-national incentive
policies designed to influence economic activity inside a region (either a
state or metropolitan area). He
uses the tentative may in his conclusion because the direct empirical
evidence on whether competition for economic development causes productivity
increases, employment redistribution to needy areas, and national employment
increases was sparse in 1991.[1][6] An
important issue, for which there is still not enough empirical evidence, is
whether competition for economic development causes economic growth in the most
needy areas.
The
approach taken here is to examine the effects of incentive offers made by local
governments within a specific metropolitan area. As Bartik has noted, this approach raises issues that can be
ignored if the unit of analysis is the entire metropolitan area or state. We believe, however, that it is a
mistake to ignore these intra-metropolitan issues if one wishes to know whether
local incentives do redirect economic activity to needy areas. In the 1990s, the areas in most need of
economic revitalization in the United States are central cities and the
surrounding inner suburbs. The
concern is not just whether one metropolitan area or state offers greater (or
fewer) development incentives than others, but how the incentive offers are
distributed throughout jurisdictions within a metropolitan area. Assuming that incentives can redirect
economic activity, a necessary condition for redirection of activity toward needy
areas is that needy areas offer more incentives.
The
important difference in incentive offers made by local governments within a
metropolitan area can be derived from the anecdotal story told in one form or
another by economic development practitioners across the country. A business new to a metropolitan area,
or one already located in the area, is about to make a location decision. The business gives the local government
leaders an impression of seriously considering a site within the area’s inner
cities, while existing the business already reside there. In order to attract the new business or
to retain the existing business, an inner city puts together an incentive
package of local tax breaks, industrial development bonds, and other
incentives. Of course, the cost of
doing business in the inner city is likely to be higher due to higher crime
rates, higher taxes, and lower public service quality. The inner city policymaker finds it
necessary to offer an incentive package as a form of compensating
differential. The mobile business
firm presents the inner city’s incentive offer to a suburban municipality and
asks them to match the offer. The
mobile business firm is able to provide a fiscal surplus, or an excess of local
tax payments over the cost of local services provided, to the suburban
city. The firm also offers the
accompanying promise of additional jobs for the suburban community. The inner city’s offer is matched by
the suburban city and the firm locates in the suburb.[1][7] The same
place it would have most likely gone without the incentive.
Such
a scenario can also be played out between two states or metropolitan areas
competing for a major manufacturing facility. This occurred repeatedly in the battles for the locations of
auto manufacturing plants such as Saturn, Toyota, Mitsubishi, etc.[1][8] The difference in local incentive offers is that the
situation of an offer/counter-offer is more likely to occur between two
competing jurisdictions in a metropolitan region. There is more than one causal reason for this. First, the non-fiscal factors that
influence a firm’s location decision are prone to be constant across cities
within a region. Thus the
manipulation of fiscal factors through incentive offers carries greater
weight. Second, the arsenal of
local incentive tools is necessarily the same between competing cities in a
metropolitan region in the same state.
The excuse that the state does not allow the city to match the competing
incentive offer is not credible.
Third, the proximity of cities within a metropolitan region makes the
transmission of information and the bargaining process much easier to
accomplish. A firm shopping for a
new site can negotiate with an inner city in the morning, present the offer to
the outer suburban city in the afternoon, and call for a response by the
suburban city council at its meeting that evening. These three factors combine to force local policymakers to
take the threat of alternative sites and competing incentive packages very
seriously.
The
unique aspect of communities within a sub-state area competing with each other
to attract economic development has been recognized by other researchers as
well. Wolman and Spitzley (1996)
have provided an extensive review of the literature on the politics of local economic
development. They point out that
many local officials view their city’s economic performance as held hostage to
the ease of capital mobility between border cities. Incentives offer a tool to combat this mobility. An environment of uncertainty and
turbulence surrounds most local economic development projects and also creates
the opportunity for local officials to pursue credit-claiming
activities. A local elected
official claims credit for a desirable firm location decision by offering an
incentive that then is attributed as the key factor in the location decision.
Wassmer (1993) pursued a
more economic approach that considers communities in a metropolitan area to be
producers of land for business use.
The issue to consider is whether cities compete or collude with each
other in the production of land.
It is in the collective interest of cities in a metropolitan area to
cooperate and pursue joint incentive policies through cartel-like production of
land for business. In so doing
cities maximize the total fiscal surplus extracted from business in the
metropolitan area. Though it is
still in the interest of any one city to pursue a non-cooperative strategy and
independently offer local incentives business. Wassmer provides empirical evidence that the norm in
the Detroit metropolitan area has not been collusion in local incentive offers,
but local competition that has steadily increased over time.
Intra-Regional Use of
Incentives
Although much of the extant literature on public
sector competition for economic
development is set at the state level or examines
the competition between major cities,
the fiercest competition for private investment is
often between neighboring cities or
cities within the same region (Goetz and Kayser, p.
63, 1993).
The previous section
presented arguments on why it is important to examine the redistribution of
economic activity caused by incentive offers of cities within a metropolitan
area. Next we review the available
evidence on the degree to which communities in major U.S. metropolitan areas
have the potential, and have chosen to compete with each other for economic
development by offering local incentives.
It is unfortunate, however, that there really is little direct evidence
to offer. A 1991 study of
inter-jurisdictional tax and policy competition by the Advisory Commission on
Intergovernmental Relations (ACIR) concludes that evidence on this issue is
lacking due to definition and measurement problems that make it difficult to
assess the degree of competition.
Given
the lack of direct evidence on intra-metropolitan incentive competition in the
United States, an alternate method is to ask how much competition for local
economic development could exist between municipalities in the largest U.S.
metropolitan areas? A key tenant
of economic theory is that competition only exists if there is a substantial
number of suppliers and demanders of the good or service under consideration.[1][9] If cities are the suppliers of land for business use, and
business firms are the demanders of that land, then the competitive requirement
is satisfied on the demand side as there are many business firms in large metropolitan
areas of the United States.
Fischel (1981) examined the
competitive requirement on the supply side by applying the notion of
concentration ratios to local governments contained in large U.S. metropolitan
areas. In the field of economics known
as industrial organization, a common technique is to measure the percentage of
sales in an industry captured by the four largest firms in the industry
(four-firm concentration ratio). A
high percentage indicates greater concentration and hence a lack of competition. For the twenty-five largest urbanized
areas in the United States in 1970, Fischel calculated two forms of
concentration ratio for the four largest suburbs in each region. The first was the total square miles of
the four largest cities divided by the SMSAs urbanized land area. The second was the total square miles
of the four largest cities divided by the SMSAs non-central city’s land
area. His results (excluding
Washington, D.C.) are reproduced in Table 1.2.[1][10]
The
central cities listed in boldface type in Table 1.2 exist in metropolitan areas
where the two concentration ratios are both less than forty percent. In these metropolitan areas the four
largest suburban cities comprise less than forty percent of the urbanized land,
and less than forty percent of the suburban land in the total metropolitan
area. A concentration ratio of
less than forty percent is often regarded as a necessary condition for
competition to exist in an industry.
A further condition for competition is a large number of cities in the
metropolitan area. As shown in
Table 1.2, the metropolitan areas containing the eleven most populated cities
in the U.S. (New York to Minneapolis) satisfy the concentration condition and
contain from fifty-eight to 399 cities in their respective metropolitan
areas. By most standards, this is
adequate evidence that these metropolitan areas have competitive markets for
manufacturing and
Table 1.2
Suburban Fragmentation and
Local Incentives in Large U.S. Metropolitan Areas
|
|
|
1970 4-Largest Suburbs |
|
1991 Availability of a
Specific Local Incentive |
|||||
|
|
|
Concentration Ratio |
|
within the Metropolitan
Area’s State |
|||||
|
|
1970 |
Percent |
Percent |
|
Local |
Local |
Local |
Property |
Sales/ |
|
Metro
Area’s |
Number |
Metro |
Metro |
|
IDBs |
IDBs |
General |
Tax |
Use |
|
Central
City |
of
Local |
Area’s |
Area’s |
|
(Tax |
(Tax- |
Obligation |
Abatem’t |
Tax |
|
|
Govt’s |
Urbanized |
Suburban |
|
Exempt) |
able) |
Bonds |
/Exempt |
Exempt |
|
|
in
Area1 |
Land2 |
Land3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New
York |
399 |
10% |
12% |
|
No |
No |
No |
Yes |
Yes |
|
Los
Angeles |
104 |
6% |
10% |
|
Yes |
No |
No |
No |
No |
|
Chicago |
178 |
5% |
7% |
|
Yes |
No |
No |
Yes |
Yes |
|
Philadelphia |
166 |
11% |
13% |
|
Yes |
No |
No |
Yes |
Yes |
|
Detroit |
97 |
16% |
19% |
|
Yes |
No |
No |
Yes |
No |
|
San
Francisco |
58 |
17% |
21% |
|
Yes |
No |
No |
No |
No |
|
Boston |
78 |
11% |
12% |
|
No |
No |
No |
Yes |
No |
|
Cleveland |
91 |
15% |
17% |
|
Yes |
No |
No |
Yes |
No |
|
St.
Louis |
116 |
11% |
13% |
|
Yes |
No |
No |
Yes |
No |
|
Pittsburgh |
180 |
12% |
14% |
|
Yes |
No |
No |
Yes |
No |
|
Minneapolis |
89 |
20% |
23% |
|
No |
No |
No |
Yes |
Yes |
|
Houston |
30 |
19% |
72% |
|
Yes |
No |
No |
Yes |
No |
|
Baltimore |
4 |
75% |
100% |
|
Yes |
No |
No |
Yes |
No |
|
Dallas |
23 |
29% |
48% |
|
Yes |
No |
No |
Yes |
No |
|
Milwaukee |
41 |
30% |
38% |
|
Yes |
No |
No |
No |
No |
|
Seattle |
29 |
50% |
69% |
|
Yes |
No |
No |
No |
No |
|
Miami |
22 |
78% |
80% |
|
Yes |
No |
No |
Yes |
No |
|
San
Diego |
12 |
32% |
74% |
|
Yes |
No |
No |
No |
No |
|
Atlanta |
26 |
51% |
74% |
|
Yes |
No |
No |
No |
No |
|
Cincinnati |
79 |
14% |
19% |
|
Yes |
No |
No |
Yes |
No |
|
Kansas
City |
46 |
31% |
86% |
|
Yes |
No |
No |
Yes |
No |
|
Buffalo |
26 |
28% |
35% |
|
No |
No |
No |
Yes |
No |
|
Denver |
25 |
21% |
31% |
|
Yes |
No |
No |
Yes |
No |
|
San
Jose |
15 |
27% |
47% |
|
Yes |
No |
No |
No |
No |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The central cities in bold
have concentration ratios less than 40 percent.
1This is the number of local
governments with final zoning authority.
2The urbanized portion of an SMSA
by definition has population density exceeding 1,000 people per square mile.
3The suburban portion of an
SMSA is all non-central-city land area.
Source: Fischel (Table 1, 1981) and NASDA (1991).
commercial business location. In addition, the smaller metropolitan
areas of Milwaukee and Cincinnati also meet the two requirements of low
concentration ratios and a large number of cities.
In
order to assure competition, not only must the structure of local governments
be competitive, but local governments must also have the capacity to offer
local incentives. Table 1.2
indicates that all the metropolitan areas that were competitive in structure in
1970 also had the state-granted ability in 1991 to offer at least one form of
local incentive. Nine of the
metropolitan areas were in states that allowed the offer of two or more forms
of these incentives. The most
prevalent type of local incentive in the large U.S. metropolitan areas defined
as competitive was the capability to issue property tax abatements or
exemptions. The comparison between
Fischel’s 1970 calculation of concentration ratios and the 1991 ability to
offer local incentives should pose little problem. Subsequent change in the number of local governments in
these metropolitan areas has been minor.[1][11]
There is evidence of the
potential for the competitive use of local incentives to attract business to
specific jurisdictions within the largest U.S. metropolitan areas. What about more tangible information on
the degree to which incentives are actually used by localities in large
metropolitan areas? Such evidence
is harder to come by. A search of
the literature yielded only a few examples. An early review of the subject by Bahl (1980) reported that
the practice of local government tax abatements to stimulate commercial and
industrial development in blighted areas was growing. Parker (1982) recorded in the City Almanac that New
York City had already foregone $200 million in annual property tax revenue due
to abatements. Glastris (1989) in U.S.
News and World Report called Hoffman Estates, Illinois “the latest loser in
the tax incentive wars” when it gave an incentive package of land,
infrastructure, tax abatements, and worker training valued at a $240 million to
attract the Sears Corporation to relocate from the City of Chicago. Burnier (1992) provided background on
local tax abatement policy in the State of Ohio and implementation in the city
of Chillicothe. She concluded that
officials view tax incentives as a tool of competitiveness that they do not
intend to relinquish. Reinhard and
Scott (1993) report that the International Downtown Association estimated that
there were at least one thousand Downtown Management Districts in North America
at the time. These districts act
to spur central business district development as special tax assessments are
used to provide services and infrastructure designed to retain and attract
commercial business. Finally, in a
recent summary of tax increment financing activity in California, Chapman
(1996) reports that in 1950 there were only two TIFA redevelopment areas in the
state. By 1990 the number had
grown to 658 project areas. The
assessed value captured by Californian TIFAs in 1990 was nearly eight percent
of the total assessed value of all property in the state.
Wolkoff
(1985) noted that because local incentives are regarded by states as a largely
local matter, few reliable statewide estimates of their use exist. Researchers who have surveyed local
governments directly have obtained some of the best sources of
information. Cable, Feiock, and
Kim (1993) offered the
results of a survey of U.S. cities with populations over 50,000 to which 219
cities responded. Forty-two
percent of the officials indicated that they offered tax abatements, thirty-two
percent offered loan subsidies of some sort, forty-seven percent offered direct
loans, thirty-four percent used cash contributions, and sixty-two percent
offered employee training as local incentives. Bowman (1988) surveyed eighty-four public and private sector
economic development officials in thirty-one southeastern cities in the United States. Her purpose was to gauge the extent and
style of inter-jurisdictional incentive competition among these cities. Respondents were given the choices of
very competitive, fairly competitive, and not competitive. Eighty-two percent of the aggregate
group of mayors, business editors, commerce and economic development staff
responded that the level of competition for economic development in their city
was very competitive. Respondents
were given the choices of high, medium, low or no response to rate the level of
competition with surrounding suburbs.
Forty-seven percent of the mayors responded high; while thirty-five
percent of the business editors, nineteen percent of the chamber staff, and
thirty-nine percent of the economic development staff did the same.
A
Goetz and Kayser (1993) survey deserves special attention. In 1991 these researchers attempted to
contact an economic development official in all 140 municipalities in the Twin
Cities metropolitan area. A total
of 109 surveys on local economic development practices were returned; of which
only fifteen reported no formal local economic development practices. Of the remaining thirty-one
non-respondents, eighty-one percent had populations less than 10,000. Goetz and Kayser conclude that the
majority of non-respondents were likely to have no formal organization to
encourage local economic development.
Thus, nearly seventy percent of the communities in this metropolitan
area were engaged in local activities designed to attract and retain economic activity.
An aspect of the Goetz and
Kayser’s survey results that warrants mention here is that eighty-five percent
of the respondents agreed or strongly agreed with the statement that
competition for economic development exists within the region. But, only about one-half of the
respondents said that they were doing well in their competitive efforts to
attract and retain local economic activity. This is not surprising if economic development activity in a
region is a zero-sum game. A
telling finding is that the cities responding as doing well experienced greater
population growth in the last twenty years. Development officials who responded that their jurisdiction
were not doing well point to negative city characteristics as the cause of
their disadvantage. Most officials
in this situation thought that the appropriate response is greater effort
directed at intra-metropolitan economic development competition in the future.
Of
special interest in the Goetz and Kayser analysis of the Twin City survey data
was an attempt to determine which cities compete with each other in a spatial
sense. When asked to name their
prime competitors, nearly every city chose cities nearby and within a narrowly
defined sub-region within the metropolitan area. A number of inner cities and first-ring suburbs said their
competition for local economic development was primarily second-ring
suburbs. Interestingly,
second-ring suburbs viewed their competitors differently and saw their
adversaries as other second-ring suburbs within their sub-region. Goetz and Kayser also used simple
correlation analysis and found that municipalities were more likely to compete
with cities of the same population and tax revenue size. Ultimately, eighty percent of the
economic development officials thought that their own local economic development
efforts provided benefits to the entire Twin Cities Region. At the same time, only thirty-nine
percent thought that local economic development activity ought to be regionally
coordinated. Considering the
existence of an innovative tax base-sharing plan that has long existed in the
Twin Cities metropolitan area, this is a discouraging finding. It offers little reassurance for
potential metropolitan-wide cooperation on local incentive offers even in a
region that is notable for its cooperation.
Local Incentives in
Metropolitan Detroit
Most [property tax] abatement activity has occurred
in the counties that have served
as the traditional sources of Michigan’s economic
strength. ...Wayne County, the
state’s
most populous, has had the largest volume of
abatement activity within it
(Wolkoff, p. 293, 1982).
As demonstrated in the
previous section, there is circumstantial evidence that most large U.S.
metropolitan areas possess the local government structure and the state-granted
capability to compete with each other through local incentive offers. Except for some noteworthy survey
evidence, there is only anecdotal evidence on the degree to which specific
types of local incentives have been offered by communities within U.S. metropolitan
areas. Fortunately, the
State of Michigan and the Detroit metropolitan area are anomalies in this
regard.[1][12] Michigan has a longer than average history of allowing local
jurisdictions to choose among a large array of local incentives. Information on the use of these
incentives has been recorded and reported by various state agencies, planning,
and watchdog groups.[1][13]
The
menu of local incentives available to Michigan communities includes industrial
development bonds, manufacturing and commercial property tax abatements, tax
increment financing, and downtown development authorities. The first industrial development bond
(IDB) offered by a city in Metropolitan Detroit occurred in 1967. As required by the IRS, the state
treasurer’s office has kept a record of all locally offered IDBs. Manufacturing property tax abatement
has been available to Michigan communities since 1974. Commercial property tax abatement was
available to Michigan cities between 1978 and 1988. The State Tax Commission, within the Michigan Treasurer’s
Office, grants final approval on each local property tax abatement and collects
data on abatements granted.[1][14]
Two other local incentives
available in Michigan are the Tax Increment Finance Authority (TIFA) and the
Downtown Development Authority (DDA).
Michigan municipalities have been able to establish TIFAs since 1980 and
DDAs since 1974. DDAs are
authorized to create and implement an economic development plan within a city’s
central business district. They
often use tax increment financing as a source of financing. Groups like the Citizen’s Research
Council of Michigan (1986) and the Southeast Michigan Council of Governments
(1990) have kept track of the establishment of TIFAs and DDAs within Michigan
jurisdictions.
Using simple descriptive statistics and correlation analysis, Wassmer (1993) found empirical evidence of increasing competition in the use of local incentives in the Detroit metropolitan area over time. Over the ten to fifteen year period that local incentives had been available, there was an average eight-fold increase in the mean local use of incentives and a decrease in the coefficient of variation in use for all forms of incentives except industrial development bonds.
Anderson
and Wassmer (1995) conducted a formal duration analysis of the adoption of
manufacturing property tax abatements by Detroit area municipalities. Duration analysis allows for the
calculation of the probability that a specific jurisdiction will begin to offer
manufacturing property tax abatements provided that it has not yet chosen to
offer this incentive. In our
statistical analysis we employed time-varying covariates and controlled for
local characteristics that could influence a city’s decision to offer its first
manufacturing property tax abatement.
The clear finding from this research is that the longer a municipality
waits to grant a property tax abatement, the greater the probability that it
will offer its first incentive in the next period. As time passes, economic and political forces cause a
community to be increasingly more likely to make an incentive offer. We attribute this finding to the
strategic motivations involved with incentive offers being a metropolitan-wide
game similar to the prisoner’s dilemma.[1][15] The
finding of greater incentive emulation over time provides evidence that the
likelihood that a competing city in a metropolitan area will match another
city’s incentive increases with the length of time since the incentive program
began.
Summary
The purpose of this chapter was
to provide an overview of economic development incentives offered by local
jurisdictions within U.S. metropolitan areas. Our study of this issue is motivated by the relationship
between many of the United State’s most pressing social and economic problems
and the unprecedented redistribution of residency and economic activity that
has occurred in the last thirty years from most of the nation’s inner cities to
their outer suburbs. In an
effort to alter this flow, inner cities have responded with an arsenal of local
fiscal incentives that appear to have been matched in numerous cases by the
outer suburbs.
We
have also tried to provide reasons why there has been very little formal
testing of the efficacy of local incentive offers made within a metropolitan
area, and to emphasize the importance of studying this issue further. Chapter one began with a broad
background on the types of sub-national economic development incentives
available in the U.S. Among these,
only industrial development bonds, general obligation bonds, property tax
abatement, sales tax exemption, and tax increment financing are locally
initiated. There is little direct
data on the use of these incentives in U.S. metropolitan areas, although an
examination of the largest metro areas showed that they exhibit a competitive
government structure and possess the ability to issue at least one form of
local incentive. Both anecdotal
and survey evidence in support of the existence of intra-metropolitan
competition was provided in this chapter as well.
The
chapter concluded with a concise description of local incentive use in
metropolitan Detroit. A primary
reason for the choice of this area as the subject of our empirical study is the
availability of information on local incentive offers. In addition, the Detroit area exhibits a
competitive local government structure, a greater than average number of types
of state-sanctioned incentives for local governments to choose from, and the
ability to offer these incentives for a period longer than the average observed
in most other states. Earlier
statistical analyses confirm the competitive nature of local incentives in the
Detroit metropolitan area.
Remainder of the Book
The remainder of our
monograph proceeds as follows.
Chapter 2 provides the reader with a retrospective on previous
work. This includes the
determinants of local economic activity, previous attempts to assess the
efficacy of local incentive offers, the issue of a spatial mismatch between
employees and employers in a metropolitan area, and an explanation of how these
topics are related in our study.
Chapter 3 provides a descriptive overview of the types of local
incentives employed in the Detroit metropolitan area and statistical evidence
on a possible spatial mismatch in the area’s labor market. Chapter 4 reviews economic models and
their implications for the effectiveness of local incentives on employment and
capital allocation decisions by business in a sub-state region. A system of simultaneously determined
equations is presented as a framework within which to examine the efficacy of
local incentives. The results of
regression estimation of the simultaneous system, and some relevant simulations
that use the regression findings, are in Chapter 5. Chapter 6 contains a summary and provides policy
recommendations.
[1][1] As given in the 1995 Statistical Abstract of the United States, 15.6 percent of the U.S. population in 1970 lived in cities with populations of 500,000 or more. By 1990 this percentage had fallen to 12.1. See Downs (1994) for a full description of the relationship between suburbanization and urban problems in the United States. As Downs points out, an additional benefit of the re-concentration of economic activity in a metropolitan area is less urban sprawl, less traffic congestion, and less air pollution.
[1][2] The incentive programs listed are the major ones traditionally offered to business. Newer forms of economic development programs became popular in the 1980s and include providing government services to assist in business decisions. Since these new wave economic development policies are more likely to be initiated at the state level, and data on their local use is difficult to acquire, this book concentrates on the use of traditional incentives. The National Association of State Development Agencies (NASDA, pp. 13-20, 1983) offers a concise description of the various forms of non-financial assistance offered within states.
[1][3] Consult Fosler (1988) for a thorough discussion of
these alternatives.
[1][4] Netzer (1991) makes this point.
[1][5] NASDA (pp. 773-778, 1991) provides a list of all the states offering the various forms of incentives described here.
[1][6] See Bartik (p. 201, 1991a).
[1][7] Bartik (p. 857, 1994) recognizes this by concluding: “Competition for jobs among jurisdictions within the same metropolitan area uses public resources without changing overall labor market opportunities in the metropolitan area.”
[1][8] See Bartik, Becker, Lake, and Bush (1987) for an example.
[1][9] Eberts and Gronbert (1988) have tested the hypothesis that an increased number of local governments per person leads to a more competitive structure and hence less expenditure per person (holding all else constant). They find the expected result that the greater the government fragmentation in a metropolitan area, the lower the local government expenditures within standard metropolitan statistical areas.
[1][10] Fischel (1981) also calculated concentration ratios for Washington, D.C.’s metropolitan area. These are excluded from Table 1.2 due to the area’s overlap with two states and the national district.
[1][11] See Wassmer and Fisher (1997) for a description of city formation in large U.S. metropolitan areas and evidence on the minor degree of change between 1980 and 1990.
[1][12] Throughout this book the Detroit metropolitan
area is defined as Macomb, Oakland, and Wayne counties. This is the same as the 1970 U.S.
Census definition of Detroit’s Standard Metropolitan Statistical Area (SMSA). In 1990 the U.S. Census defined the
Detroit Metropolitan Statistical Area (MSA) as containing Lapeer, Livingston, Macomb, Monroe, Oakland, St. Claire,
and Wayne Counties. We have chosen
the more limited 1970 definition because it better accounts for a region where
communities are more likely to compete with each other for the location of many
of the same businesses.
[1][13]A complete description of the local incentives offered in the Detroit metropolitan area is contained in Chapter 3.
[1][14] Wolkoff (1986) has already
used this data to provide a summary of manufacturing tax abatement awards in
Michigan counties up to the mid-1980’s.
[1][15]The prisoner’s dilemma is a widely discussed game in the social sciences that demonstrates that given the inability to coordinate decisions among individuals, the self-interested choice made by one is not in the interest of all.