SAY NO TO OUTDOORS RETAIL SUBSIDIES

Pittsburgh Post-Gazette
Forum: Wholesale use of retail TIFs
A development tool designed to serve blighted areas has been hijacked
excerpt
Sunday, October 13, 2002
By Jake Haulk and Eric Montarti

Beyond the misuse of blight to get a TIF subsidy, the trend toward subsidizing retail establishments is extremely worrisome. There is only so much consumer spending power in a community. If new retailers get a subsidy, they are in effect given an unfair advantage over the area's existing retailers. Jobs created at the new site are likely to be accompanied by loss of jobs at other nonsubsidized retailers in the region.

The danger is that with every new retail TIF project, pressure will mount for neighboring communities to respond by offering their own TIF projects for new or existing retailers. Potential serious overbuilding of retail space is almost inevitable, further eroding the viability of existing strip malls and shopping districts with the accompanying decline in property values and erosion of tax base.

Retailing is constantly reinventing itself and the ways it serves its customers. There will be ups and downs naturally in the market sites over time.

But shopping venue cycles should be left to the interplay of private market forces. Government involvement will almost certainly produce undesirable, unintended consequences. A region that needs to grow a real economic base cannot hope to do that with retail subsidies. There is no export component and there is no multiplier effect. Retailing is a dead-end development strategy.

Gordon to cities: Tax lures must end
Calls rivalries over retail 'destructive'

Ginger D. Richardson
The Arizona Republic
Phoenix Mayor Phil Gordon on Tuesday challenged Valley cities to stop giving public subsidies to developers who want to build big-box retail stores and auto malls.

The issue is a high-stakes one in the Valley, where cities are estimated to have given or offered more than $300 million in incentives in recent years. Even now, Chandler and Gilbert are engaged in a bidding war for auto malls on sites about two miles away from each other.

Gordon says that money could be better spent on public safety and education.

"You all know me," Gordon said. "I am not anti-development. But how do we justify these upside-down spending sprees?

"It's destructive. It's shortsighted, and I say close the public checkbook on these projects and let the market dictate where retail development goes."

"You heard the wild applause when the mayor mentioned this idea? That was me," Hallman said. "These incentives are extraordinarily destructive to the economic viability to the cities in this area.

"We need to stop looking at this on a municipal level and look at it on a regional basis rather than the way we do now, in hostile competition with each other."

©Arizona Republic 2004

KHQ-TV

BOISE, ID.. - Legislators from North Idaho hope a tax refund bill will help lure outdoor retailer Cabela's to Post Falls. Representative Frank Henderson, a Republican from Post Falls who is co-sponsoring the bill, said Cabela's is considering building a store off Interstate 90. Representative Bob Nonini from Coeur d'Alene is also co-sponsoring the legislation. Henderson says the bill now being drafted would give the retailer a sales tax refund to build an interchange to the store. The bill would provide Cabela's a 75 percent tax refund until they recover costs for the construction. Estimated costs for the interchange are about $12 million.

(1-10-06 at 5:45pm by KHQ Local News and The Associated Press)

Tax Increment Financing: A Bad Bargain for Taxpayers

By Daniel McGraw
First published by Reason Magazine, January, 2006

If you're imagining an attraction that will draw 4.5 million out-of-town visitors a year, the first thing that jumps to mind probably isn't a store that sells guns and fishing rods and those brown jackets President Bush wears to clear brush at his ranch in Crawford, Texas. Yet last year Cabela's, a Nebraska-based hunting and fishing mega-store chain with annual sales of $1.7 billion, persuaded the politicians of Fort Worth that bringing the chain to an affluent and growing area north of the city was worth $30 million to $40 million in tax breaks. They were told that the store, the centerpiece of a new retail area, would draw more tourists than the Alamo in San Antonio or the annual State Fair of Texas in Dallas, both of which attract 2.5 million visitors a year.

The decision was made easier by the financing plan that Fort Worth will use to accommodate Cabela's. The site of the Fort Worth Cabela's has been designated a tax increment financing (TIF) district, which means taxes on the property will be frozen for 20 to 30 years.

Largely because it promises something for nothing—an economic stimulus in exchange for tax revenue that otherwise would not materialize—this tool is becoming increasingly popular across the country. Originally used to help revive blighted or depressed areas, TIFs now appear in affluent neighborhoods, subsidizing high-end housing developments, big-box retailers, and shopping malls. And since most cities are using TIFs, businesses such as Cabela's can play them off against each other to boost the handouts they receive simply to operate profit-making enterprises.

A Crummy Way to Treat Taxpaying Citizens
TIFs have been around for more than 50 years, but only recently have they assumed such importance. At a time when local governments' efforts to foster development, from direct subsidies to the use of eminent domain to seize property for private development, are already out of control, TIFs only add to the problem: Although politicians portray TIFs as a great way to boost the local economy, there are hidden costs they don't want taxpayers to know about. Cities generally assume they are not really giving anything up because the forgone tax revenue would not have been available in the absence of the development generated by the TIF. That assumption is often wrong.

“There is always this expectation with TIFs that the economic growth is a way to create jobs and grow the economy, but then push the costs across the public spectrum,” says Greg LeRoy, author of The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation. “But what is missing here is that the cost of developing private business has some public costs. Road and sewers and schools are public costs that come from growth.” Unless spending is cut—and if a TIF really does generate economic growth, spending is likely to rise, as the local population grows—the burden of paying for these services will be shifted to other taxpayers. Adding insult to injury, those taxpayers may include small businesses facing competition from well-connected chains that enjoy TIF-related tax breaks. In effect, a TIF subsidizes big businesses at the expense of less politically influential competitors and ordinary citizens.

“The original concept of TIFs was to help blighted areas come out of the doldrums and get some economic development they wouldn't [otherwise] have a chance of getting,” says former Fort Worth City Councilman Clyde Picht, who voted against the Cabela's TIF. “Everyone probably gets a big laugh out of their claim that they will draw more tourists than the Alamo. But what is worse, and not talked about too much, is the shift of taxes being paid from wealthy corporations to small businesses and regular people.

“If you own a mom-and-pop store that sells fishing rods and hunting gear in Fort Worth, you're still paying all your taxes, and the city is giving tax breaks to Cabela's that could put you out of business,” Picht explains. “The rest of us pay taxes for normal services like public safety, building inspections, and street maintenance, and those services come out of the general fund. And as the cost of services goes up, and the money from the general fund is given to these businesses through a TIF, the tax burden gets shifted to the regular slobs who don't have the same political clout. It's a crummy way to treat your taxpaying, law-abiding citizens.”

Almost every state has a TIF law, and the details vary from jurisdiction to jurisdiction. But most TIFs share the same general characteristics. After a local government has designated a TIF district, property taxes (and sometimes sales taxes) from the area are divided into two streams. The first tax stream is based on the original assessed value of the property before any redevelopment; the city, county, school district, or other taxing body still gets that money. The second stream is the additional tax money generated after development takes place and the property values are higher. Typically that revenue is used to pay off municipal bonds that raise money for infrastructure improvements in the TIF district, for land acquisition through eminent domain, or for direct payments to a private developer for site preparation and construction. The length of time the taxes are diverted to pay for the bonds can be anywhere from seven to 30 years.

Local governments sell the TIF concept to the public by claiming they are using funds that would not have been generated without the TIF district. If the land was valued at $10 million before TIF-associated development and is worth $50 million afterward, the argument goes, the $40 million increase in tax value can be used to retire the bonds. Local governments also like to point out that the TIF district may increase nearby economic activity, which will be taxed at full value.

So, in the case of Cabela's in Fort Worth, the TIF district was created to build roads and sewers and water systems, to move streams and a lake to make the property habitable, and to help defray construction costs for the company. Cabela's likes this deal because the money comes upfront, without any interest. Their taxes are frozen, and the bonds are paid off by what would have gone into city coffers. In effect, the city is trading future tax income for a present benefit.

But even if the dedicated tax money from a TIF district suffices to pay off the bonds, that doesn't mean the arrangement is cost-free. “TIFs are being pushed out there right now based upon the ‘but for' test,” says Greg LeRoy. “What cities are saying is that no development would take place but for the TIF.…The average public official says this is free money, because it wouldn't happen otherwise. But when you see how it plays out, the whole premise of TIFs begins to crumble.” Rather than spurring development, LeRoy argues, TIFs “move some economic development from one part of a city to another.”

Development Would Have Occurred Anyway
Local officials usually do not consider how much growth might occur without a TIF. In 2002 the Neighborhood Capital Budget Group (NCBG), a coalition of 200 Chicago organizations that studies local public investment, looked at 36 of the city's TIF districts and found that property values were rising in all of them during the five years before they were designated as TIFs. The NCBG projected that the city of Chicago would capture $1.6 billion in second-stream property tax revenue—used to pay off the bonds that subsidized private businesses—over the 23-year life spans of these TIF districts. But it also found that $1.3 billion of that revenue would have been raised anyway, assuming the areas continued growing at their pre-TIF rates.

The experience in Chicago is important. The city invested $1.6 billion in TIFs, even though $1.3 billion in economic development would have occurred anyway. So the bottom line is that the city invested $1.6 billion for $300 million in revenue growth.

The upshot is that TIFs are diverting tax money that otherwise would have been used for government services. The NCBG study found, for instance, that the 36 TIF districts would cost Chicago public schools $632 million (based on development that would have occurred anyway) in property tax revenue, because the property tax rates are frozen for schools as well. This doesn't merely mean that the schools get more money. If the economic growth occurs with TIFs, that attracts people to the area and thereby raises enrollments. In that case, the cost of teaching the new students will be borne by property owners outside the TIF districts.

Such concerns have had little impact so far, in part because almost no one has examined how TIFs succeed or fail over the long term. Local politicians are touting TIFs as a way to promote development, promising no new taxes, and then setting them up without looking at potential side effects. It's hard to discern exactly how many TIFs operate in this country, since not every state requires their registration. But the number has expanded exponentially, especially over the past decade. Illinois, which had one TIF district in 1970, now has 874 (including one in the town of Wilmington, population 129). A moderate-sized city like Janesville, Wisconsin—a town of 60,000 about an hour from Madison—has accumulated 26 TIFs. Delaware and Arizona are the only states without TIF laws, and most observers expect they will get on board soon.

First used in California in the 1950s, TIFs were supposed to be another tool, like tax abatement and enterprise zones, that could be used to promote urban renewal. But cities found they were not very effective at drawing development into depressed areas. “They had this tool, but didn't know what the tool was good for,” says Art Lyons, an analyst for the Chicago-based Center for Economic Policy Analysis, an economic think tank that works with community groups. The cities realized, Lyons theorizes, that if they wanted to use TIFs more, they had to get out of depressed neighborhoods and into areas with higher property values, which generate more tax revenue to pay off development bonds.

The Entire Western World Could Be Blighted
Until the 1990s, most states reserved TIFs for areas that could be described as “blighted,” based on criteria set forth by statute. But as with eminent domain, the definition of blight for TIF purposes has been dramatically expanded. In 1999, for example, Baraboo, Wisconsin, created a TIF for an industrial park and a Wal-Mart supercenter that were built on farmland; the blight label was based on a single house in the district that was uninhabited. In recent years 16 states have relaxed their TIF criteria to cover affluent areas, “conservation areas” where blight might occur someday, or “economic development areas,” loosely defined as commercial or industrial properties.

The result is that a TIF can be put almost anywhere these days. Based on current criteria, says Jake Haulk, director of the Pittsburgh-based Allegheny Institute for Public Policy, you could “declare the entire Western world blighted.”

In the late 1990s, Pittsburgh decided to declare a commercial section of its downtown blighted so it could create a TIF district for the Lazarus Department Store. The construction of the new store and a nearby parking garage cost the city more than $70 million. But the property taxes on the new store were lower than expected, as the downtown area surrounding Lazarus never took off the way the city thought it would. Sales tax receipts were also unexpectedly low. Lazarus decided to close the store last year, and the property is still on the block. Because other businesses were included in the TIF, it is impossible to predict whether the city will be on the hook for the entire $70 million. But given that the Lazarus store was the centerpiece of the development, it is safe to say this TIF is not working very well, and Pittsburgh's taxpayers may have to pick up the tab.

If businesses like Lazarus cannot reliably predict their own success, urban planners can hardly be expected to do a better job. Typically, big corporations come to small cities towing consultants who trot out rosy numbers, and the politicians see a future that may not materialize in five or 10 years. “The big buzzwords are economic development,” says Chris Slowik, organizational director for the South Cooperative Organization for Public Education (SCOPE), which represents about 45 school districts in the southern suburbs of Chicago, each of which includes at least one TIF. “The local governments see a vacant space and see something they like that some company might bring in. But no one thinks about what the costs might be.…They are giving away the store to get a store.” Big-box retail chains such as Target and Wal-Mart seem to be the most frequent beneficiaries of TIFs. (Neither company would comment for this story, and local politicians generally shied away as well.)

Given the competition between cities eager to attract new businesses, TIFs are not likely to disappear anytime soon. “Has it gone overboard?” asks University of North Texas economist Terry Clower. “Sure.…But the problem is that if a city doesn't offer some tax incentives, the company will just move down the road.” According to Clower, “In a utopian world, there would be no government handouts, and every business would pay the same tax rate. But if a city stands up and says they aren't doing [TIFs] anymore, they will lose out.”

Instead, it's the competitors of TIF-favored businesses that lose out. Academy Sports & Outdoors, which employs 6,500 people, has about 80 sporting goods stores in eight Southern states, including a store in Fort Worth. When the Fort Worth City Council was considering the TIF for Cabela's, Academy Sports Chairman David Gochman spoke out against the tax incentives, realizing that his company is a big business, but not big enough. “This is not a nonprofit, not a library, not a school,” he said. “They are a for-profit business, a competitor of ours, along with Oshman's and Wal-Mart and others.”

TIFs Have Become the Standard Handout
Al Dalton, owner of Texas Outdoors, a 10,000-square-foot hunting and fishing shop in Fort Worth, echoed the sentiment that the city was favoring one business over another. “We don't have the buying power, and we don't have the advertising dollars,” Dalton said. “It doesn't make any difference even if we've got the best price in town if nobody knows about it. The deep pockets, in every way, [make] a lot of difference.”

And that may be the key to understanding how TIFs are now applied: The companies with the deep pockets are able to fill them with subsidies.

The Cabela's location in Fort Worth does not fit any of the blight criteria people had in mind when TIFs were first created. The 225,000-square-foot store, with its waterfalls, multitude of stuffed animals, and wild game café, sits on prime property just off Interstate 35. It is a few miles down the road from the Texas Motor Speedway (which has its own TIF), and the 200,000 NASCAR and IRL fans who attend races there three times a year—not to mention the fans who come to the speedway's concerts and other special events—might want to shop at Cabela's.

The area around Cabela's is affluent and has been growing for years. A half-dozen shopping centers nearby were on the drawing board well before the TIF was considered. Within a five-mile radius of the hunting/fishing megastore, 10,000 new homes have been built since 2000. That same area is expected to grow by 20,000 people in the next two years.

But the argument against the “but for” assumption is not being heard. In 2004 a state judge threw out a lawsuit against the Cabela's TIF by a Fort Worth citizens' group that claimed blight was never proven, and that the city was misusing TIFs in a prosperous area that needed no tax breaks for future development. The blight designation came from a pond and stream on the property. It was an odd designation, given that the property is in a prime development area and ponds and streams are not what one would classify as blighted.

The press releases and newspaper articles about the new Cabela's emphasize that the store is going to draw more people to Texas than visit the Alamo (the studies were done by Cabela's). The press release never mentions that a Bass Pro Shop store, part of a chain almost identical to Cabela's, is just 10 miles down the road. While Cabela's was negotiating its TIF with Fort Worth, it was also negotiating a TIF with the city of Buda, 120 miles away, outside of Austin. Cabela's got about $20 million from Buda, and the same tourist claims are being made there. If each Texas store is going to draw 4.5 million tourists, as the chain claims, that means 9 million people will be coming to Texas every year just to visit the two Cabela's stores.

“The notion that a hunting store would draw all these tourists is ridiculous,” says Greg LeRoy. “But what is even more ridiculous is cities thinking that tax breaks are the primary reason businesses relocate or expand in certain areas. There are so many other factors at play—transportation costs, good employment available, housing costs and quality of life for executives—that the tax breaks like TIFs aren't very high up on their priority list. But these corporations are asking for them—and getting them—because everyone is giving them out. TIFs have become the standard handout, and the businesses have learned how to play one city off the other. Businesses would be stupid for not asking for them every time.”

If TIFs continue to multiply at the present rate, we may see the day when every new 7-Eleven and McDonald's has its own TIF. That prospect may seem farfetched, but it wasn't too long ago that cities wouldn't even have considered giving up tens of millions of dollars in exchange for yet another store selling guns and fishing rods.

Daniel McGraw, freelance writer in Fort Worth, is the author of First and Last Seasons: A Father, A Son and Sunday Afternoon Football (Random House).
© 2006 Reason Foundation

Businessman Pits Principle Against Politics

It’s considered a political truism that an incumbent officeholder’s fortune is tied directly to the state of the economy. If things are going well economically, the politician takes credit; if things aren’t going so well, the politician’s opponent assigns blame. As a result of this thinking, there is a general sense among most politicians that economic matters, notably economic “development”, are the appropriate province of the state. After all, if politicians are elected and defeated based on the economy, they should exercise some say in the matter.

In many urban communities, local politicians exercise power through various “economic development” schemes. The essential purpose of these schemes is to confiscate private wealth through taxation, then redistribute that wealth to businesses favored by the politicians. One of the more popular schemes is using tax revenue to finance professional sports stadiums. But even more mundane retail markets have seen the impact of economic development initiatives, such as the case of Bass Pro Shops and Oklahoma City.

In 1993, Oklahoma City launched the Metropolitan Area Projects program, known as MAPS. From 1993 until 1999, the city levied a one-cent sales tax that generated $309 million plus another $47.5 million in interest. These funds were then used to finance a variety of business projects in the city, including a convention center, a music hall, and yes, even a baseball stadium. All of these things could have been built without the government’s “assistance,” but then local politicians would have had no record of achievement to take back to the voters.

One of the crown jewels of the MAPS program is the Bricktown Entertainment Center, a retail and entertainment complex being built along an artificial canal. Bricktown’s anchor tenant is Bass Pro Shops, a Missouri-based sporting goods retailer. To get Bass Pro into Oklahoma City, local officials gave the company more than $17 million in subsidies using public funds. Under a 15-year lease, Bass Pro will pay the city approximately $6 per square foot per year for 110,000 square feet of retail space. Oklahoma City may not be New York or San Francisco, but that’s a below market rate by any standard.

The $17 million comes from three city tax funds—the MAPS operation and maintenance fund, a fund used to finance capital improvements for the city’s schools, and a third fund used to finance equipment for public safety agencies. City officials say the sales taxes generated by Bass Pro over the 15 years of the lease will cover this $17 million “loan”. But this claim covers up a key fact: most of Bass Pro’s sales will come from existing businesses forced to compete with the government-sponsored retailer. Oklahoma City’s own analyst said that 41% of Bass Pro’s expected sales will be “transfers,” meaning they’ll come at the expense of the city’s 65 existing sporting goods retailers (and that doesn’t include large discount stores like Wal-Mart). Thus, Oklahoma City residents and businesses are forcing a transfer of wealth from local merchants to a larger national merchant; what they’re not doing is promoting “economic development” or growing the economy in any substantial manner.

What’s especially galling here is that Oklahoma City officials could have supported a Bricktown development that would have used no taxpayer funds whatsoever. During the bidding process for Bricktown’s development rights, local businessman Moshe Tal submitted a proposal for a privately financed Bricktown Entertainment Center. The city rejected his offer, instead awarding the contract to developer Randy Hogan. Hogan then turned around and demanded the $17 million in taxpayer funds to get Bass Pro into his development.

Tal says Hogan got the contract because of political connections to local officials, including Oklahoma City Mayor Kirk Humphreys, who allegedly owned real estate holdings once managed by Hogan. Tal accuses dozens of city officials of “self-dealing” with one another to promote Hogan’s development—and the Bass Pro subsidy—to the detriment of the taxpayers.

In May, Tal and his advocacy group, Taxpayers for Honest Government, filed a qui tam lawsuit against Humphreys and about 40 other parties seeking a judgment nullifying the Bass Pro deal. “Qui tam” means Tal and taxpayers brought their action on behalf of the State of Oklahoma. This is similar to the “private attorney general” claim made infamous in Nike v. Kasky. But unlike the Nike case, Tal is not an uninformed activist trying to harm a private business, but an injured businessman trying to remedy the economic damage inflicted by the government.

The case is still in its early stages. In a bizarre move, the city’s Urban Renewal Agency, which supervises the MAPS program, sued the city, seeking a judicial declaration that the Bass Pro deal was legal. This is sham litigation, since the city obviously won’t oppose its own subsidy scheme. Urban Renewal’s objective is to short-circuit Tal’s case by getting a judge to sign off on the city’s actions.

Tal’s lawsuit is an all-too-rare example of individuals fighting back against corrupt government action. Just as religious freedom requires the separation of church and state, economic freedom requires the separation of economics and state. In an era where complacency and settlement are considered civic virtues, the mere notion of fighting on principle is considered radical, if not outright insane. But until more Moshe Tals stand up and fight for their rights, the belief that politicians are the rightful agents of economic development will remain a false governing principle of our society.

—Skip Oliva

Opposition to subsidy of Bass Pro Store Grows

Texas-based Academy Sports and Outdoors, one of the nation's largest sporting goods chains, is being accused of pumping $100,000 into a campaign to kill a proposal by Oklahoma City to subsidize an Oklahoma City store for Springfield, Missouri-based Bass Pro Shops. The campaign, which includes radio and print ads is being run by Citizens Against Taxpayer Abuse. Also opposed to the city's plan, is Jeff Tebow, Oklahoma City owner of Outdoor Outfitters. Oklahoma City Mayor Kirk Humphreys and other Downtown civic leaders say the Bass Pro store will bring tourists and jobs to Oklahoma City.

Opponents of the Bass Pro Deal charge that Oklahoma City taxpayer dollars will be used to bring in a private business to compete with existing businesses which are not subsidized. They fear the deal will put hundreds of existing jobs in jeopardy and establish an expectation of government subsidies for future incoming businesses. Academy, which is planning to open another store in the city (not at taxpayer expense), says it is unfair competition.

The opponents note that the city's own study of the proposal shows that over 40% of the sales at the proposed Bricktown Bass Pro store would come at the expense of Academy, Outdoor Outfitters, and other existing retailers. In addition to the businesses that would suffer from the proposed deal, there is growing opposition from Oklahoma City taxpayers. A poll released April 3, 2002 by Citizens Against Taxpayer Abuse shows that two thirds of Oklahoma City residents oppose the use of taxpayer dollars to fund a Bass Pro Shop at Bricktown in Oklahoma City. The survey was conducted by Baselice and Associates, a national polling firm with extensive credentials in polling and public opinion research. The poll of over 500 randomly selected Oklahoma City voters was conducted on March 27-28, 2002. Jeff Kaufmann, spokesperson for Citizens Against Taxpayer Abuse, explained that "67% of those surveyed oppose the use of tax dollars for the project."

Under the proposed deal, the City would spend up to $18 million to construct Bass Pro's proposed 110,000 square-foot building. The construction would be financed through a bond issue, and repaid with an annual pledge of City sales tax revenue. The final bond cost of the store would be $2.5 million per year. According to the proposed 15-year contract, Bass Pro would pay only $600,000 a year to occupy the building. So, Oklahoma City taxpayers would be paying 75% of the rent.

City leaders argue increased sales taxes generated by the store will help make the bond payments. According to the City's consultant, Bass Pro Shops, which is partially owned (19 percent) by Gaylord Entertainment Co., could make $38.5 million in annual sales at the proposed Oklahoma City store. The Oklahoma City Council must still approve the final deal being negotiated between the City and Bass Pro. Opponents hope to convince the Council to reject the deal.

Case Study of Cabela's Inc.

Cabela's has been selling supplies for hunting, fishing and other outdoor sports for more than four decades, but in recent years it has gone from being a retailer to being a retail phenomenon. It has achieved this by building a string of mega-stores featuring waterfalls, aquariums, museum-quality wildlife displays--and, of course, a wide selection of gear for the outdoorsperson. The stores are so popular that they have been become top tourist destinations in states such as Kansas and Minnesota, drawing millions of visitor-shoppers a year.

Cabela's success is not based entirely on slick merchandising. The company exploits the eagerness of local officials to land one of its stores by getting them to provide tax-increment financing deals and other subsidies that help defray the cost of expansion. So important are these subsidies that, when Cabela's filed an initial public offering prospectus in 2004, the company had to acknowledge their role, warning investors of dire consequences if the public assistance came to an end. The prospectus stated:

Historically, we have been able to negotiate economic development arrangements relating to the construction of a number of our new destination retail stores, including free land, monetary grants and the recapture of incremental sales, property or other taxes through economic development bonds, with many local and state governments...We may not be able to obtain similar economic development packages in the future. The failure to [do so] could cause us to significantly alter our destination retail store strategy or format. As a result, we could be forced to invest less capital in our stores which could have an adverse effect on our ability to construct the stores as attractive tourist and entertainment shopping destinations, possibly leading to a decrease in revenues or revenue growth.

In other words, without subsidies, Cabela's business prospects would suffer. But do the Cabela's subsidy packages pay off for taxpayers? To justify subsidizing a tourist destination, you have to attract shoppers from outside the state, so you capture new sales tax revenue plus new hotel and restaurant business. If you only draw local dollars, that would mean you are merely shuffling those dollars among local vendors.

The Allentown Morning Call set out to determine if the $32 million subsidy package bestowed on the 247,000-square-foot Cabela's that opened in Hamburg, Pennsylvania in 2003 was paying off. The newspaper went back to the state and local agencies that bragged about the taxpayer benefits of the original deal. But the Pennsylvania Department of Economic and Community Development said it was not tracking sales tax revenue. And Tilden Township said it had no data on local property tax revenues. So no one knows if the deal is stimulating other new development. None of the public officials could provide any specific numbers about the deal's outcome.

And what about that tourism strategy, with the store projected to attract 6 to 7 million visits a year? Merchants in downtown Hamburg told the newspaper that they are not getting much spill-over traffic. Reporter Sam Kennedy counted license plates in the parking lot, finding more than two thirds were in-state. Cabela's responded by claiming that by dollar volume, less than a third of the store's sales go to Pennsylvanians.

Ultimately, the Call couldn't make a call. "The impact of Cabela's is nearly impossible to assess because Pennsylvania, like many states, doesn't pay close attention to such projects after the ribbon-cutting ceremonies have ended, the news cameras have stopped rolling and the politicians have gone home," it concluded.

In other words, the public officials who take credit for high-profile deals are not about to go back and look to see if they are wasting taxpayers' money. By failing to keep records, they also make it hard for others to discover the truth.

SOURCES
Greg LeRoy, The Great American Jobs Scam. San Francisco: Berrett-Koehler Publishers, 2005, pp.64-67.
Cabela's Form S-1 filed with the Securities and Exchange Commission on March 23, 2004.
Mike Kaszuba, "Rogers Offers Welcome Mat to Cabela's," Minneapolis Star-Tribune, January 26, 2005.
Sam Kennedy, "Have Cabela's tax breaks paid off? No one can say since state does not verify claims that any business makes about creating jobs and revenue," Allentown Morning Call, October 17, 2004.
Mitchell Schnurman, "Giveaway to Cabela's Shows Texas' Priorities," Ft. Worth Star-Telegram, May 26, 2004.

PLEASE ORGANIZE YOURSELVES AND DO SOMETHING ABOUT THIS NATIONAL TREND BEFORE IT'S TOO LATE! PAYING TO SUBSIDIZE YOUR COMPETITION MAKES ABSOLUTELY NO SENSE.

4.8.2005
Cap Needed on Cities’ Developer Subsidies
by Dave Wells
Published Friday, April 8, 2005 in East Valley Opinins of the Arizona Republic as “Cap needed on cities’ developer subsidies.”

The circus has arrived in Mesa with performances now through May 17 featuring some truly jaw-dropping stunts. Marty DeRito, developer of the Riverview at Dobson project, is sponsoring 20 Mesa Little League teams so children’s uniforms can tout the project. Dan Harkins supports the “No” camp as market analyses indicate only one of two competing cinemas can be sustained—and his is part of the competing subsidized Tempe Marketplace a couple miles away. Jeff “Alt Fuels” Groscost has funneled $32,000 into the “No” campaign while just happening to be a consultant on the Tempe project.

May I suggest, we not do this again.

As an economist, when cities subsidize retail it galls me. The basic premise of retail development is to locate in proximity to the customer, so where you have people, you’ll have retail. If cities think subsidies are needed, taxpayers need a state legislative fix.

If the Mesa Riverview project is built, money spent there will not drop out of thin air. If I buy a television at Wal-Mart, I’m not going to be buying another one at Best Buy.

Disregard the developer’s projections that the developer and city will split $146 million in tax revenue over the next 20 years. It assumes all tax dollars are new and fails to factor in that a dollar today is more valuable than a dollar you have to wait 20 years to receive.

If one assumes that two out of every three dollars spent at Mesa Riverview would have otherwise been spent outside Mesa, then I project over the next 20 years Mesa will net in current dollars between $11 and $18 million on this project. The developer will net between $43 and $59 million, using Ernst & Young’s build out estimates. Why isn’t the gain two-thirds for the city, if two-thirds might be new dollars? Because Mesa is giving between 50 and 75 percent of city sales tax revenues back to the developer, Mesa only gains new revenue after the one-third of sales replacing other sales in Mesa are covered. Across all cities, developers profit at taxpayer expense.

Competing with fellow cities to increase sales tax revenues is lousy policy. Cities shouldn’t be placed in this position. While I find it encouraging that Tempe, Chandler and Phoenix have identified a subsidy-free zone, it’s a mistake to think this zone solves the problem. A regional problem requires either the intervention of the Maricopa Association of Governments (MAG) or the State Legislature.

HB2499 (formerly SB1201) sponsored by Sen. Jack Harper (R-Glendale) and Sen. Ken Cheveront (D-Phoenix) would outlaw these subsidies and slap a sharp financial penalty on cities which proceed to use them anyway. It’s supported by most of the East Valley legislative delegation. Meanwhile, the cities balk at a loss of local control.

I consider this legislation sound tax policy. The bill gives cities ample leeway. As developers are often made to pay for road improvements, regardless of whether a project succeeds, the bill allows cities the discretion of repaying developers for this expense. Likewise, environmental clean up costs can be reimbursed. That’s not to say there’s no room for adjustments. For instance, if in effect as currently drafted the Riverview project’s shared sales tax subsidies would be illegal, but the Tempe Marketplace would be exempt because it’s in a redevelopment zone, an unfair advantage. While in economically depressed areas some subsidies beyond reimbursing site preparation costs might be needed, a cap of 25 percent of sales taxes over 10 years would be wise.

To give cities a chance, the measure only goes into effect if MAG can’t deal with the problem by next April. The cities still want to kill it.

Look beyond the Mesa Riverview debate and call your State Senator and Representatives at 1-800-352-8404. Tell them you want local sales taxes for parks and police, not for developers!

Dave Wells of Tempe holds a doctorate in Political Economy and Public Policy and teaches at Arizona State University. Reach him at Dave@MakeDemocracyWork.org.

Providing tax breaks and other kinds of subsidies to attract or retain businesses has become increasingly common. Businesses promise communities new jobs, tax revenues, and better economies in exchange for billions of taxpayer dollars. If communities don’t agree with underwriting their operations, the businesses threaten to skip town, if they are already there, or to settle in the town next door. Without accountability, companies use taxpayer subsidies to fatten profits instead of investing it into the workers, business, or local community.

The American public has become increasingly outraged at the abuse of taxpayer-backed subsidies. Taxpayer’s hate to hear that their tax money is going to underwrite the profits of a large corporation. For example, Frank Luntz, a pollster who works for the Republican Party leadership, says that “corporate welfare” is ranked third on a list of “things people flip out on.” The only two that come in ahead of “corporate welfare” are, one “foreign aid” and two “waste, fraud and abuse.”

ACCOUNTABLE DEVELOPMENT & SMART GROWTH FOR WORKING FAMILIES
Good Jobs First is the nation’s leading resource center for grassroots groups and public officials seeking to make economic development subsidies more accountable and effective. We also promote smart growth policies that enhance the well-being of working families.

http://www.goodjobsfirst.org/

http://www.fresc.org/?zone=/unionactive/private_view_page.cfm&page=Publications
Publications

RESEARCH FORMS AN INTEGRAL PART of FRESC’s work. Our in-house research capacity enables us to develop legislative proposals and offer critical analysis of both government and corporate policies that affect low-income workers and communities.
Over the past several years, FRESC has released several major studies. These include reports on the Wal-Mart development proposal and Tax-Increment Financing and Urban Redevelopment in Denver. FRESC researchers also provide critical support to our various organizing and advocacy projects, producing timely campaign and popular education materials.

Are We Getting Our Money’s Worth: Tax-Increment Financing and Urban Redevelopment in Denver

Part I – What Do TIF Subsidies Cost Denver?: The Increasing Scale of TIF and its Budget Impacts January, 2005
Part II: Who Profits from TIF Subsidies?: National Chains, Local Businesses, and Our Private Developer Partners May, 2005
Part III: Are We Building a Better Denver with TIF Subsidies?: Job Quality & Housing Affordability at TIF-Subsidized Projects December, 2005

Dr. Dave: Do state and local economic development tax incentives help state and local economies?

A. In the vast majority of cases, the answer is no. Robert G. Lynch, Chairman of the Department of Economics at Washington College sums up the thinking of most economists. There are “little grounds to support tax cuts and incentives—especially when they occur at the expense of public investment—as the best means to expand employment and spur growth.”[1]

Billions of dollars a year are “spent” by states, counties, and cities on economic development incentives in various forms (e.g. tax abatements, tax reductions, direct grants, infrastructure investment, etc.) Government officials and private sector applicants argue that these tax expenditures pay for themselves in additional revenue created by new or expanded businesses and job creation.

Over the last 30 years, hundreds of public and private sector analyses have evaluated the impact and value of economic development incentives.[2] Their conclusions vary widely; most often because of variations in the way they approach the analysis.

Any study of the value of economic development incentives must first decide what to count as costs and benefits. Most analyses, remarkably, count only benefits. A report by the Massachusetts Budget and Policy Center concludes that a series of studies suggesting that corporate tax incentives lead to job growth “appears to be fundamentally flawed, as it simply assumes that the Commonwealth does not have to pay for corporate tax incentives.”[3]

More sophisticated studies include the negative, as well as the positive side, of the equation. That means taking into account a number of different costs.

1. Additional public and private costs generated by a large new business. For example, increased congestion, higher overall labor costs, environmental deterioration, new infrastructure costs, and additional public service costs such as police and fire protection.

2. Loss of tax revenue resulting from the negative impact of the new business on existing businesses.

This is particular true for incentives to businesses that only sell their product or services to the local community (e.g. retail). Having a Wal-Mart or a Home Depot move into the area does not increase overall spending on groceries or light bulbs. It redirects spending for those items that would otherwise go to other local businesses.

Retail incentives are almost always a net revenue loser. (See the New Rules Retail Sector for a list of studies and local initiatives in this area).

Incentives to sports arenas have a similar negative net impact, although some might argue that there may be an important qualitative benefits attached to such incentives (e.g. being a “major league” city).

3. Budget cuts that result from spending on economic development incentives.

This is especially important to consider when, as is the case today, overall budgets are tight or being cut. Which brings up another important feature of tax incentives. Direct appropriations – everything from education, to transportation, to maintaining state office buildings – must be approved each and every year. Tax expenditures, on the other hand, carry over automatically, with no need for annual approval and without regard to existing fiscal conditions.

The national trend in the 1990s was to reduce business taxes and create or expand incentives for business investment. At that time, state tax receipts were growing at about 6 percent a year. By 2000, however, state forecasters were already predicting that tax revenues would barely keep pace with inflation as delayed tax cuts began to take full effect.[4] Today those incentives are still draining money from local and state treasuries even while core budgets are being cut.

As one observer notes, “Rather than requiring a vote in favor of continuation, a tax expenditure continues until a vote in favor of eliminating it occurs.”[5] And such a vote requires political courage, for it is viewed as a tax increase. It is far easier to cut direct expenditures than it is to cut tax expenditures.

4. Reduced economic development because of cuts in public services.

Ironically, economic development incentives can lead to less economic development if they lead to cuts in public services. Studies have consistently found that spending on public services – especially education and infrastructure – has a positive effect on economic development.[6]

A review of existing literature on incentives conducted for the Louisiana Department of Economic Development in 2003 concluded tax incentive programs “often have no measurable impact on growth, and even when they do, it is likely that they are not cost-effective…most economists in the field would recommend economic development policy based on sufficient and appropriate infrastructure investment and service provision, and a balanced, predictable and fair tax system.”[7]

5. Benefits that would have occurred without the incentives.

Often the benefits credited to tax incentives would have occurred anyway. A number of studies focusing on the role of tax credits in job creation have found that 55-70 percent of the tax credits granted to employers are payments for workers who would have been hired without the subsidy.[8] One analysis mockingly concluded, “incentives have very little effect on actual growth, but they have a substantial positive effect on announced growth.” Studies of Enterprise Zones, the new darling of advocates of government involvement in economic development, indicate that most of the incentives are used by existing businesses that would have expanded anyway.[9]

[1] Robert G. Lynch, Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development, Economic Policy Institute, March 2004.

[2] A recent report by the Massachusetts Budget and Policy Center summarizes the findings of the leading studies. Tax Expenditures and Economic Development, Massachusetts Budget and Policy Center, April 27, 2004.

Curbing Corporate Welfare

Providing tax breaks and other kinds of subsidies to attract or retain businesses has become increasingly common over the last twenty years. Wal-Mart, for example, has received over $1 billion in public subsidies from state and local governments, according to a recent report by Good Jobs First.

There are three primary problems with development subsidies:

Questionable Public Benefit - Few cities and states have binding standards to ensure that subsidies actually produce quality jobs. A study in Minnesota found that half of recent subsidy deals went to companies paying wages more than 20 percent below market levels for their industries.

Pirating Jobs - Cities and towns frequently use tax incentives and development subsidies to lure companies from other cities or states. Corporate threats of relocation can spark a bidding war between cities. "Job piracy" produces no real economic benefit, as no new jobs are created.

Undermining Local Businesses - Subsidies are rarely provided to locally owned businesses. Instead, these businesses often see their tax dollars used to subsidize their biggest competitors.

Subsidies are particularly unwarranted in the retail sector. Providing subsidies and tax breaks for big box development not only creates an uneven playing field for locally owned businesses, but studies have found that big retail stores produce no net gain in employment. That is, they destroy as many jobs as they create by taking sales away from existing businesses that then downsize or close. Big box retail also contributes to sprawl and increased public costs for services like road maintenance and police.

RULES:

Anti-Piracy Laws
Almost all federal economic development programs now have anti-piracy provisions, which bar aid to a company that is relocating from one state to another. A number of states have enacted similar measures. A California law, for example, prohibits public agencies from providing any form of assistance to auto dealerships or large-scale retail stores relocating from one city to another in the same market area. A Michigan law allows a city to veto a property tax abatement provided by another city when it's used to move a business from the former city to the latter.

Living Wage Laws
Some cities have adopted living wage laws that stipulate that any company receiving a tax break or public subsidy pay wages sufficient for employees to meet basic needs.

Regional Tax-Base Sharing
The quest for revenue-generating development creates competition among neighboring jurisdictions, which may engage in bidding wars to offer developers the biggest tax breaks or least stringent environmental regulations. Regional tax-base sharing offers one way to alleviate this problem.

TIF Reform
When used to off-set the high costs of redeveloping blighted sites in poor neighborhoods, Tax Increment Financing (TIF) can be an effective economic development tool. However, all too often, cities are using TIF to underwrite projects in non-blighted, affluent areas, to subsidize construction on previously undeveloped land, and to finance big box retail.

Daniels: Store incentives overpriced
Jan. 6, 2006
By Michelle L. Quinn / Post-Tribune correspondent

HAMMOND — Gov. Mitch Daniels absolutely wants Cabela’s to come to Indiana, but the state won’t be paying the store’s asking price to do it.

According to the Indiana Economic Development Corp., retail businesses move money only from place to place instead of bringing new money into the economy, Daniels said. He was the speaker Thursday during The Lakeshore Chamber of Commerce’s Business After Hours event at Horseshoe Casino.

While sporting goods stores Cabela’s and the proposed Bass Pro Shop in Portage have the potential to bring millions of dollars into the state, allowing them both to have sales increment tax financing (STIF) — which is on the books but has never been used in Indiana, according to Daniels — would cost more than it’s worth.

“Both companies asked for identical amounts of money, and the (IEDC) didn’t like it,” he said. “The IEDC has measured the cost benefits of spending the money vs. the return, and we don’t do retail.”

Daniels also said Indiana has another sporting goods entity, Gander Mountain, that never asked for the amounts of money Cabela’s and Bass Pro Shop have.

“We’d love to see them both come to Indiana, and we plan to entice them with other tools. But we don’t know how we can offer them 10 or 20 times more (than Gander Mountain received),” Daniels said.

Hammond Mayor Tom McDermott Jr. could not be reached for comment Thursday night.

http://www.post-trib.com/cgi-bin/pto-story/news/z1/01-06-06_z1_news_10.html

Nov. 10, 2005
Arizona Lawmakers Pledge to Ban Big-Box Subsidies

"The practice of competing to see who will kick-back the most taxpayer money to certain mega-businesses has gotten obscene," declared Arizona State Representative Rick Murphy, one of several leading Republican lawmakers who say they will push for a ban on retail subsidies when the state legislature convenes in January. Heavily dependent on sales tax revenue, Arizona cities have been trying to lure big-box stores, shopping centers, and car dealerships by offering massive subsidies and tax breaks. Bidding wars among neighboring towns are not uncommon. Recent examples include an $84 million incentive package provided to Wal-Mart and Bass Pro Shops by the city of Mesa; a $1.5 million subsidy for Costco in Phoenix; and $16.7 million for a Cabella's outdoor store in Glendale. Because a region's retail sales are based on the size of the population and disposable income, such incentives do not increase overall retail activity or sales tax revenue. Individual cities may become temporary winners when new shopping centers open within their borders, but it is only a matter of time before they are eclipsed by new centers in other communities. Mayors of cities in the greater Phoenix area had pledged earlier this year to work towards an agreement to limit subsidies. So far, however, their efforts have not yielded much in the way of results. Frustrated with the lack of local movement, a growing number of legislators are concluding that a state ban on at least some types of retail subsidies is necessary. Arizona Chain Reaction, a statewide coalition of nearly 800 independent businesses, has come out strongly in favor of a statewide prohibition on subsidies.