pa315 lecture 5 a

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PA 315

Government Business Relations

Lecture 5

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Agenda

Governments roles with business Economic growth and government

How does government pay for economic development?

The case of Californias economic development zone programs

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Economic Growth and Government

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Definitions of Economic Growth Common sense definition:

Economic growth is concerned with wealth enhancement, that isincreases in financial value (or loss).

Classical definition

Economic growth is the increase in the value of goods and

services produced by an economy. It is conventionally measured as the percent rate of increase in real

gross domestic product, orGDP.

Growth is usually calculated in real terms, i.e. inflation-adjustedterms, in order to net out the effect of inflation on the price of thegoods and services produced.

In economics, economic growth or economic growth theorytypically refers to growth of potential output, i.e., production at fullemployment, rather than growth of aggregate demand.(Wikepedia)

Ignores: all non-financial values issues; also emphasizes short-term financial

value over long-term sustainability

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Growth and Government

Governments are generally concerned witheconomic growth (or maintenance if they arehighly developed) but they are concerned withother factors as well such as security, quality oflife, equity, etc.

A review of growth factors indicates that mostare somewhat or highly affected by government.Those in bold are highlighted this class.

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Factors That Can Lead to Economic Growth

(or decline if lacking)

Population

Human capital productivity (e.g., education)

Innovation (e.g., process improvements or inventions)

Land intensification (low yield agricultural to high yield, or

plentiful agricultural to in-demand housing) Resource availability (e.g., minerals, specialized workforce, or

natural resources such as forests)

Transportation (access to roads, rivers, canals, airports)

Climate (suitable climate and suitable conditions)

Culture and amenities (e.g., desirability of location, productsfrom a location)

Synergy among factors (e.g., cluster theory)

(more)

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Economic Growth Factors (continued)

General government policies (non-business policiesaffecting peace and stability, public safety, quality of life,welfare)

Government policies specifically related to business

Regulatory macro: fiscal and monetary policy, trade policy;

micro: planning, zoning, and inspection for environmental, safety, andquality of life factors

Promotional policies (e.g., corporate subsidies,infrastructure enhancements, risk protection [insurance],

seed money and incubation funds, etc.) Government contracting

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Economic Development

An activity to encourage private investment in a

particular jurisdiction for the purpose ofgenerating or retaining jobs, expanding the tax

base, and increasing the general level ofeconomic well-being (Eisinger, 2002)

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How Does Government Pay for

Economic Development?

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Financing Economic Development: Methods

Tax reduction (aka tax break): Abatement

A partial reduction of the property tax liability of a given piece ofreal estate for a specified number of years

For new or rehabilitated industrial or commercial property,blighted property

Exemption

Freedom from the obligation to pay a particular tax

For purchases, investments, and activities other than real

estate development, e.g. raw materials, machinery, equipment Credit

A reduction in the tax bill

For job creation or research and development expenses

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Public borrowing (based on future income) IRB (industrial revenue bond):

issued by state and local government publicauthorities. Subsequent loans are either at

favorable rates (partially by federal taxexemption) and/or guaranteed.

TIF (tax increment financing):

using municipal bond issued based on theexpected increase in property taxes that arecollected by an economic development agency.

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Tax Increment Financing

Source: ifgfunding.com

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Quick sidebar on the recent legal

change in CA

Nationally, there has been much debate about the utilityof TIF funding

Proponents argue that without redevelopment powers(esp. TIF), the core parts of cities around the state wouldhave been disintegrated and that new development isunfairly subsidized (and re-investment is discouraged)

Critics argued that it was unfair redistribution andbecame a corrupted practice. For a critique of redevelopment

using Tax Increment financing, view:http://www.youtube.com/watch?v=0u5aPAyeXGQ

(although the video is about North Dakota, CAs case is nearly the same,

except that in CA there are property tax limitations so the affected jurisdictionsget less money to provide services)
http://www.youtube.com/watch?v=0u5aPAyeXGQhttp://www.youtube.com/watch?v=0u5aPAyeXGQ

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Federal sources (programs funded byfederal taxpayers), e.g.,

Community Development Block Grant (CDBG)

Empowerment and Enterprise Zone Community Development Financial Institution

Technology transfer program

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Special taxes (earmarked for development),e.g.,

hotel tax,

use tax on subsidized activity, sin tax,

special sales tax

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General fund (other than tax breaks which arereductions from the general fund) especially as the ultimate guarantor of investments, e.g.,

getting better rates through municipal bonds (less risk)

providing insurance programs (e.g., flood insurance incoastal areas)

improvements/services that promote development (newroads and other infrastructure, special programs to assistbusiness such as training and education, etc.)

seed money (one-time grants), e.g., development revolvingfunds, loan of property for charitable purpose

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Public-private partnerships (joint ownershipwhich enables larger projects, public landassembly powers, and/or public backing)

public pays part of the expenses for its portionof large projects through a variety of the abovemechanisms

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Californias State Economic

Development Zone Programs andLocal Redevelopment Agencies

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Californias Economic Development Zone

Programs

Enterprise zones

Local agency military base recovery areas(LAMBRAs)

Targeted tax areas Manufacturing enhancement areas

California Zones
http://www.caez.org/index.htmlhttp://www.caez.org/index.html

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Californias Economic Development

Zone Programs

Enterprise zones: 42 Designated by California Trade and Commerce Agency (TCA)

for 15 years

To provide tax incentives to businesses and allow private sector

market forces to revive the local economy Tax incentives:

Credit for sales tax or use tax on the purchase of qualified machinery andparts

Credit for wages paid by employers to disadvantaged individuals (50% thefirst year; reduced on sliding scale)

Credit of 5% for wages received by qualified employee

Deduction of interest income on qualified loans

Expensing all or part of qualified property

100% operating loss carry forward for 15 years

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Zone Programs

Local agency military base recovery areas (LAMBRAs):8 Designated by TCA for 8 years

To attract reinvestment and re-employ workers

Tax incentives: Up to 100% Net Operating Loss (NOL) carry-forward; may be

carried forward for 15 years.

State tax credits for each qualified employee hired up to $2 millionper year with a few provisions.

Corporations can earn sales tax credits on purchases of $20 millionper year of qualified machinery and machinery parts.

Upfront expensing of certain depreciable property, up to $40,000annually.

Unused tax credits can be applied to future tax years, stretching out

the benefit of the initial investment.

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Zone Programs

An example: LAMBRA in the Inland Empire

Norton Air Force Base, San Bernardino a military installation of the US Air Force

selected for close in 1988 and finally closed in 1995

major projects imminent or under way:

Stater Bros distribution center, 2007

Pep Boys facility, 2004

Mattels 10-year lease, 2003

Kohls shop

a map of the Base:(http://www.pe.com/localnews/inland/stories/PE_News_Local_D_nortonside26.203763e.html)
http://www.pe.com/localnews/inland/stories/PE_News_Local_D_nortonside26.203763e.htmlhttp://www.pe.com/localnews/inland/stories/PE_News_Local_D_nortonside26.203763e.html

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Zone Programs

Manufacturing Enhancement Areas: 2 (Brawleyand Calexico in Imperial County)

Designated to encourage manufacturing and certain

agricultural activities for 15 years (1998-2012) Benefits:

Streamlined local regulatory controls.

Reduced local permitting fees.

Eligibility for state tax credits for each qualified employeehired.

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Zone Programs

Targeted tax areas: 1 (Tulare County)

Designated for economically distressed areas for 15years (1998-2013)

State incentives include: Tax credits for sales and use taxes paid on certain

machinery, machinery parts, and equipment.

Tax credits for hiring qualified employees.

Fifteen year net operating loss carry-forward.

Accelerated expense deductions.
http://www.tularecountybiz.org/http://www.tularecountybiz.org/

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Redevelopment Agencies

Approximately 400 were located in the state untilFebruary 1, 2012 when dissolved by Governor

Community Redevelopment Act of 1945 (CRA)

Gave cities and counties the authority to establishredevelopment agency (RDA)

Vested the local RDA the powers to fight blight

Tax increment financing allowed in 1952 with CA the

first in the nation [now first to dissolve]; RDAs alsohad powers of land assembly, eminent domain

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(redevelopment agencies, cont.)

Located in all large and medium-sized cities andcounties in the state

Set up as a parallel agency; the city councilmembers or supervisors functioned as the boardfor the redevelopment agency

Controlled approximately 20% of the states

property tax revenue Cities and counties must decide whether they

want to take over all or part or the agencies andthe attendant responsibilities

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