The Northampton city council will be voting on a resolution Thursday night which would approve the Wright Architectural Millwork project as a certified project within the Northampton Industrial Park Economic Opportunity Area, would grant them a five percent Tax Increment Financing (TIF) exemption on the new growth for a period of five years beginning in FY 2010 and authorize the mayor to execute and implement the TIF Agreement. This would allow Wright about $1,900 in local tax benefits on their new growth over five years and about a $91,000 state tax credit. The city has granted other companies TIF status in recent years, including The Big Y and the Gazette among others, arguing that the money from the state is the real incentive and that the local costs are minimal, and this may indeed be true. The Wright capital investment in this case is $1.825 million and they will pay local property taxes on 95% of that value. According to the calculations on the application their annual property taxes will grow from $9,408 without the TIF in 2009 to $16,750 annually with the TIF commencing in 2010, a nice bump. In addition they promise to create four new permanent jobs and to contribute $4,000 toward sidewalk improvements in the industrial park. Clearly this seems like a good thing.
Thomas A. Garrett, a research officer and economist at the Federal Reserve Bank of St. Louis, and Paul Rothstein, an associate professor of economics and associate director of the Weidenbaum Center on the Economy, Government, and Public Policy at Washington University in St. Louis think differently in general however.
In their article from The Regional Economist, "The taking of prosperity? Kelo vs. New London and the economics of eminent domain," Garrett and Rothstein opine that local governments use the TIF option among others to target specific projects in their area because of a perception, whether real or imaginary, that the local area suffers from a lack of growth. They continue that economic development tools of this type are unlikely to lead to an overall increase in societal welfare because each tool simply involves a transfer of income from one group to another, often resulting in a zero-sum [game].
The example they offer: "Suppose a local government takes $10,000 from Peter and gives it to Paul, who plans to open a business. Paul then uses the $10,000 to open his business, which creates tax revenue and jobs. From a social welfare point of view, Peter loses $10,000 and the savings or consumption benefits of his $10,000, Paul gains $10,000 to open a business, and jobs are created. By taking the $10,000 from Peter and giving it to Paul, the local government is essentially saying that Paul can create greater societal wealth with Peter’s $10,000 than Peter can." In this case the local and state governments are indicating that Wright can better use the total of $93,000 in tax breaks than the local and state taxpayers from which the funds are drawn can.
Garrett and Rothstein continue, "Of course, it is impossible for local governments to know if greater wealth would have been created by allowing Peter to keep his $10,000 rather than giving it to Paul. Economic theory tells us that in the absence of incomplete information or externalities (how often does that happen?), free markets will result in the most efficient allocation of resources and greater economic growth. By replicating the above scenario across thousands or millions of individuals, the likely result is that the costs and benefits will average out to be the same, thus creating a zero-sum [game]. Thus, the same level of economic development would have likely occurred if Peter kept his original $10,000." In other words, at the state level, redistributing the $93,000 to taxpayers would generate the same societal welfare according to the authors.
Finally they offer what, in their opinion, governments can do to promote economic development that yields positive economic growth. Rather than use these types of tools to target individual economic development projects, local governments should ask the fundamental question as to why the desired level of economic growth is not occurring in the local area without significant economic development incentives. "For example, are taxes too high, thus creating a disincentive for business to locate to the local area? Do current regulations stifle business creation and expansion? All of the targeted economic development in the world will not compensate for a poor business environment. From a regional perspective, local governments should focus on creating a business environment conducive to risk-taking, entry and expansion rather than attempting targeted economic development through eminent domain or other means."
As Northampton continues its self reflection through the Notre Dame/Northampton Design Forum, the Rezoning Committee, the Sustainability Plan, and its committee on Best Practices among others, perhaps it will arrive at more effective regulations that protect the environment and our quality of life while streamlining the economic development process. We can do it all can’t we?
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