Tax Increment Follies

Today's Minneapolis Star Tribune brings us the story of Coloplast, a Danish medical products company with operations in Minnesota.  The company built a $39 million building along the Minneapolis riverfront, financed in part by $4 million in aid from the City.  Tied to the aid were goals for hiring additional 500 workers, including more workers from the City's poorer North Side.

Most of the aid ($3 million) consisted of Tax Increment Financing (TIF), a subsidy where the city forgoes property taxes otherwise owed on improvements, for a time, allowing the funds to be used to offset the capital investment.  The idea is that without such a subsidy, the investment would not have occurred.  In addition, the state provided $500,000 in forgivable loans and a regional government entity, the Metropolitan Council, provided additional funds for site cleanup.  The state loans have been repaid, with interest.

Two years down range and employment at the site is lower, not higher than before.  Of course the economy, worldwide, has been down the past few years.  But this exercise points out a number of issues that touch on economic development, tax policy, and rebuilding the middle class.

The Antiplanner, Randal O'Toole, has been critical of the use of TIF funding, and has chronicled efforts to end the practice in California.  As a form of crony capitalism, the use of TIF raises all kinds of concerns.  In that weekend Wall Street Journal piece on the decline of Baltimore which I previously discussed, the most basic complaint about city policy was that,

"If tax breaks for the connected are a good idea, why not give them to everyone?"

As a medical supplies company, this city investment plays into the urban political elite's obsession knowledge workers, developing a highly-educated workforce for the post-industrial economy.  Sound good.  But it turns out that the "corporate" jobs on offer were a poor match with the available workforce.  Despite completing a state-funded job skills training program, the company charitably reports that, "All of the graduates that we hired started out strong, but could not meet our attendance rules."  The newspaper also reports that "[m]uch of [Coloplast's] U.S.-based manufacturing will go to China."

Bard College Professor Walter Russell Mead writes about similar situations in his essay "Beyond the Big City Blues",

"Think of the path to successful middle class living as a ladder; the lower rungs on that ladder are not nice places to be, but if those rungs don’t exist, nobody can climb.  When politicians talk about creating jobs, they always talk about creating “good” jobs.  That is all very well, but unless there are bad jobs and lots of them, people in the inner cities will have a hard time getting on the ladder at all, much less climbing into the middle class."

Coloplast is providing "good" jobs, but as the job training experience revealed, what the local workforce needed was something else.  In Mead's words,

"The first and most important precondition for returning health to poor urban neighborhoods is the creation of large numbers of private sector jobs that relatively unskilled people can do. ...So where will the jobs come from?  Answer: if they come at all they will come from small business and many of these jobs will not be particularly attractive."

The City's heart is in the right place in its efforts to revamp the riverfront and bring good jobs to a blighted area.  However, their approach needs to be turned upside down.  Keeping taxes low for all businesses, not just a favored few, will create an environment where small business, "bad jobs", and opportunities for the relatively unskilled can develop.