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Take Your Poison: Hemlock Semiconductor Demands Costly New Subsidies from Michigan

June 18, 2008

With Governor Granholm’s support, both houses of Michigan’s legislature recently approved creation of a tax credit to offset the energy costs of Hemlock Semiconductor, a company seen as key to the state’s high tech future. The tax credit proposal is now attached to state energy policy legislation that is still pending.

Hemlock, a joint venture of Dow Corning and two Japanese firms, manufactures polycrystalline silicon for solar cells and for electronics, and its 30-40% annual sales growth has driven rapid growth in production capacity. Site Selection recently ranked Hemlock’s $1 billion expansion in Saginaw County—the third in three years–as one of 2007’s top ten business deals.

The 12-year tax credit, which the energy-intensive firm wants to defray Michigan’s “uncompetitive” energy costs, is Hemlock’s price for further expansion in the state. It would be expensive, costing the state $357 million, or an estimated $900,000 per job for the 400-500 jobs projected for Hemlock’s next expansion.

The proposed credit is also “fully refundable,” i.e., it becomes an outright payment from the state’s general fund in years when Hemlock’s Michigan tax bill is too low to take the full credit.

Even in Michigan circles favoring lower business tax rates, the company-specific handout has had some critics. The Republican chair of the senate finance committee, Nancy Cassis, fears the credit could “put a hole in the state’s budget” and add to the burden of “all companies not as large as Hemlock Semiconductor that are the backbone of our communities.”

Russ Harding of the Michigan-based Mackinac Center for Public Policy, a free-market think tank, also decried the proposed credits: “We gave them incentives to get them here. Now they’ve got leverage and say they’ll leave without more incentives. Where does it stop?”

It’s hard to say. In fact, the new subsidy would come soon after Governor Jennifer Granholm’s approval of “anchor zone” tax breaks for Hemlock, to be based on jobs created by silicon “wafer” manufacturers that locate in a zone around Hemlock’s Michigan plant.

One blogger noted these incentives are “part of a master plan to turn Michigan into a high-tech nirvana, where a few hundred jobs here and there will supposedly make up the shortfall created by the thousands of manufacturing jobs that have already left the state.”

Meanwhile, the legislation does not require Hemlock to create a definite number of jobs or maintain a specific level of investment in its next Michigan expansion, or to repay state incentives if it does not.

Ironically, the proposal to underwrite Hemlock’s intensive energy consumption is now linked to energy legislation that, while promoting more power plant construction, would also set tougher energy efficiency standards for Michigan business. 

The TIF That Won’t Die?

June 13, 2008

The Chicago Reader reported last week on the 18-month lifespan extension of a downtown TIF district that had already benefited from hundreds of millions in diverted property tax revenue and had been scheduled for retirement in 2007. The current extension is rumored to be a dress rehearsal for a full 12-year extension.

The Central Loop TIF district was created in 1984 to spur development in the apparently jinxed Block 37—where plans for a new station providing rapid transit to O’Hare Airport have just collapsed—but it now covers a wide swath of the Loop, one of the nation’s leading business and commercial hubs. The district’s geographic expansion is an especially glaring example of how state and local governments in Illinois have turned TIF into a largely unregulated diversion of property tax revenue to spur development in already affluent or thriving areas.

Having burst its original physical boundaries, the Central Loop TIF district, like others in the state, has stretched its physical life as well. In Illinois, TIF districts are supposedly created for areas designated as “blighted”, allowing increases in property tax revenue in the district to be reserved for further economic development rather than allocated to local taxing authorities. State law originally limited the ordinary duration of TIF districts to 23 years, and public officials seeking to create TIFs still cite this time limit.

However, the Reader’s Ben Joravsky, who has extensively covered the cost to taxpayers, education, and public services of TIF overuse/abuse, recently reported that the Chicago City Council in 2000 quietly extended the original 23-year lifespan of the Central Loop TIF district, due to expire in June 2007, to December 2008.

The extension was made possible by a 1999 state measure pushed by Mayor Daley and City of Chicago lobbyists, who claimed TIF districts were being short-changed because of the lag between when taxes were levied and when they are actually collected. However, Joravsky cited figures from the Cook County Clerk’s office that show the Central Loop TIF had already collected over $2 million in diverted tax revenue within three months of its creation in 1984.

With the extended duration of some TIF districts to as long as 35 or 36 years–an eternity for school districts, park districts, and other services dependent on property tax revenue– their economic development promise has become a nightmare.

The cost to schools and other public services and the unaccountability of Chicago’s TIF districts has long been controversial, due to the pioneering critiques of the Neighborhood Capital Budget Group (now defunct), the Center for Economic Progress and Illinois Housing Action. Cook County Commissioner Mike Quigly also has called for more accountability and openness in TIF expenditures by Chicago and its suburbs.

Even the Civic Federation, a leading Chicago business organization, called in 2005 for the Central Loop and some other Chicago TIF districts to be retired so tax revenues could be restored. Last year a Federation report called for a city TIF budget, since “TIF expenditures now occur in such a sporadic and obscure fashion that voters have difficulty knowing what’s really happening.”

The tax revenues appropriated by TIF districts in economically robust areas are large.Last year, the Cook County Clerk’s office noted that the Central Loop TIF was one of two Chicago TIFs that “alone are collecting more revenue ($152.5 million) this year than all Cook County spends from property taxes toward public health.” According to county figures cited by the Reader, the extension of the Central Loop TIF has meant an additional windfall of $48 million in diverted revenue for the first half of 2008 alone.

Nevertheless, Mayor Daley—who recently lobbied the Illinois legislature for $180 million for Chicago’s financially strapped school system, one of the public services starved by diverted TIF tax revenue —is reportedly seeking the legislature’s permission to extend the life of the Central Loop TIF by another 12 years.

Oregon’s Limits on Growth Reduce Impact of Housing Price Decline

May 29, 2008

Even as other states struggle with housing price declines that have cut homeowner borrowing and spending power, Oregon’s land use controls are being credited with bolstering its housing market and economy.

Housing sales in the state have slowed and home prices in several Oregon cities have been described as “overvalued.” But compared to Midwest and Sun Belt states, where home prices have typically declined 20 percent, Oregon’s housing market remains strong.

For example, a recent Chicago Tribune article cited the 4.5 percent rise in 2007 housing prices in North Plains, a small town near Portland located in Oregon’s thriving high-tech “Silicon Forest.”

Unlike Phoenix and the San Francisco Bay Area, where similar high tech booms have sparked speculative housing construction and sprawl, North Plains and other Oregon communities have higher-density housing, the result of urban growth boundaries that protect farm, forest and coastal areas and that keep housing supply better aligned with actual demand. As a result, according to the Tribune, Portland area housing prices so far have only fallen slightly.

In the 1970s, growth management policies were adopted to protect Oregon from what then Governor Tom McCall, a Republican, called the “grasping wastrels of the land.” McCall noted that “unlimited and unregulated growth leads inexorably to a lowered quality of life.”

While free market proponents continue to decry Oregon’s growth management policies as a potential drag on the state’s economy, current evidence strongly suggests that (in addition to other benefits) such “sensible growth” policies are instead stabilizing the state’s economy in a period of economic turbulence.

Stars in Their Eyes? Cost of State Film Subsides Soar, Along with Concern

May 2, 2008

After decades of taxpayer-funded “smokestack chasing”, many states are now trying to lure Hollywood film projects with big subsidies. In a remake of beggar-thy-neighbor competition, states in every region are matching and surpassing special tax breaks for the film industry. Meanwhile, as these tax giveaways become more common and so less effective, the actual economic and fiscal payoffs of this subsidy-driven competition remain in doubt.

Still, starry-eyed state officials have been rushing to launch new incentive programs to attract film productions, or extend or expand existing ones. The Michigan legislature recently fast-tracked a package of film industry subsidies, including a fully refundable 42% tax credit for production costs for Governor Granholm’s signature. New York recently tripled its film tax incentive to compete against Connecticut and other neighboring states.

The necessity and efficacy of film industry subsidies has become a dogma for their proponents in state government and in the film industry. Seeking renewal of the Illinois Film Tax Credit (a 20% rebate on qualifying in-state expenditures), Governor Rod R. Blagojevich recently touted a seven-fold increase of film industry spending in the state from a low of $23 million in 2003 to a record $155 million in 2007, while claiming 26,000 film project jobs in 2006.

However, Blagojevich did not report the cost of the state’s subsidies to the film industry, the quality and duration of the jobs created, or the tax revenues generated by film projects.

In fact, the number of critics of state film incentives seems to be growing. A 2006 analysis by the Federal Reserve Bank of Minnesota concluded that while such incentives are indeed popular, “neither will you find much evidence that, as a strategy, incentives do anything better than break even at the public box office.” While noting that film industry incentives do seem to bring film projects to states that have few, a Federal Reserve Bank of Boston study noted that they are also costly, particularly since film production does not generate significant economic activity in other business sectors.

Meanwhile, the high cost of film tax credits is becoming clearer. Massachusetts’s new refundable tax credit, which even reimburses unprofitable film companies with no tax liability, is expected to soon exceed $100 million annually. The chief economist of Louisiana’s state fiscal office describes the state’s film $50 million-a-year film credit as a “government subsidy program” whose costs exceed its benefits, while Connecticut and Rhode Island are reportedly re-examining the real costs versus benefits of their film subsidy programs. Cities like San Francisco hurt by competition from other regions are trying to find ways to support homegrown film producers. Perhaps these small steps towards rationality will eventually inspire other states and cities to restrain this particularly unprofitable interstate competition.

New Analysis Confirms Chicago Area Job Growth Bypasses African-American Communities

April 16, 2008

A new analysis by the Chicago Reporter, an on-line magazine that monitors Illinois policy issues, highlights the mismatch between the places in the Chicago region where rapid job growth has been concentrated and the places where the region’s African-American community–with an unemployment rate five times that of whites–lives.  

 

The Reporter’s review of employment and population data from 1990 through 2006 shows that in the 41 municipalities where blacks made up less than 1% of the population, the number of jobs grew nearly 60,000. In contrast, the 14 municipalities with large African-American populations (30% or more) lost 45,000 jobs in the same period.

 

The Reporter’s findings complement findings of Good Jobs First’s 2007 Gold Collar report, which mapped state subsidy spending between 1990 and 2004.  The report described how these subsidies overwhelmingly supported business location and expansion in Chicago’s already affluent, mainly white and job-rich suburban counties and communities.

 

These were also areas that had little affordable housing and few public transit options for job seekers from Chicago neighborhoods and suburbs with high unemployment. As the Reporter article notes, African-American job-seekers from Chicago’s South Side seeking work in fast growing McHenry County must choose between moving to costly, segregated neighborhoods or making long commutes by car. 

 

Mapping the geographical distribution of other economic development, education, and infrastructure spending remains essential to promote more regional equity.  But more aggressive use of existing policy tools, like the 2006 Illinois Business Location Efficient Incentives law, is also crucial. The law provides a modestly increased corporate tax credit for companies locating or expanding in areas with available affordable housing and/or transit access, and should be promoted vigorously to redirect more job growth back to older and needier urban areas.  

 

With No Tax Breaks to Lure Venture Capital, Oregon Still Sees It Double

April 2, 2008

In many states, advocates of cutting taxes on capital gains (profits from sales of business assets) have claimed lower rates would increase the flow of venture capital and so clear the pathway to rapid economic growth.

Hoping to cash out quickly with big capital gains, venture capitalists provide critical large scale financing to technology startups that most states see as crucial to high-wage economic growth. But the distribution of venture capital investment has remained lopsided, with 60% going to California and metropolitan Boston. Lower tax rates on venture capital gains in other states would supposedly make the playing field more even.

But this theory may stumble over some hard facts from a new analysis by the Oregon Center for Public Policy (OCPP). It reveals that while continuing to tax capital gains at the same rate as other income, Oregon has seen its venture capital investments double within a year, rising from $153 million in 2006 to $302 million last year.

OCPP’s analysis of data from PricewaterhouseCoopers and the National Venture Capital Association report found that in 2007 Oregon ranked 9th among states for venture capital investment per capita, up from 19th place the previous year. Oregon’s per capita venture capital investment in 2007 was at least double that of 32 other states. In addition, the top states for venture capital, Massachusetts and California, also tax capital gains as much or more than ordinary income.

OCPP policy analyst Michael Leachman cites research universities, and easy access to markets and suppliers, as bigger lures to venture capital: “There’s a reason why venture capital gravitates toward places like Boston and Silicon Valley, and it’s certainly not the tax rate on income from capital gains.”

In fact, as Leachman notes, tax breaks that reduce revenue available for investment in research and public infrastructure could even reduce venture capital investment. Hopefully, this message will encourage other states, most of which still tax capital gains like ordinary income, to hold the line.

Chicago Nixes Second Wal-Mart: The End of Its Urban Strategy?

March 25, 2008

Apparently to preserve Mayor Richard Daley’s détente with organized labor, Chicago government has nixed a renewed effort by Wal-Mart to build a new Supercenter in the predominantly African-American Chatham neighborhood on Chicago’s South Side.

In vetoing the bid, Chicago’s planning commissioner–who must approve stores bigger than 100,000 square feet– cited the 2004 promise by the original lead developer that Wal-Mart would no longer be part of the Chatham Market retail development, which is located at a former industrial site in a Tax Increment Finance (TIF) district. Since the company has been effectively shut out of Los Angeles, Boston, and New York City, Chicago has been described as “ground zero” in Wal-Mart’s strategy for moving into untapped urban markets.

In 2004, the company’s effort to put a store in Chicago’s impoverished West Side provoked a bitter battle in Chicago City Council. Unions and community organizations including ACORN mounted a citywide effort to block the notoriously anti-union, low-wage company from operating in the city. Wal-Mart succeeded only after Mayor Daley wielded his first-ever veto against a union-backed bill that would have required “big box” stores like Wal-Mart to pay a “retail living wage” or provide compensating benefits. However, Wal-Mart’s success in getting a West Side location was not duplicated in its simultaneous bid for a South Side store in the Chatham development. Support for the proposed Wal-Mart from the Chatham neighborhood’s local alderman could not overcome organized community opposition.

In order to win zoning changes needed for the larger Chatham project, and a reported $33 million in TIF funds for environmental clean-up, Monroe Investment Partners LLC told city government Wal-Mart would no longer be part of the Southside development. But when Archon Group, a unit of investment bank Goldman Sachs, became lead developer for the Chatham site, it renewed the bid to include a Wal-Mart store.

Backers of the proposed Southside Wal-Mart claim the store would provide new grocery options for a depressed area, although there are already a Food 4 Less and Jewel-Osco located nearby. Other residents in the South Side and elsewhere in Chicago cite Wal-Mart’s anti-labor stance and conservative politics as a reason to continue to keep it out. Having spent at least $2.5 million in the aldermanic elections that followed the Mayor’s veto, Chicago unions have threatened to reintroduce the retail living wage measure if a second Wal-Mart is approved.

The experience of the existing West Side store is decidedly mixed. The store’s sales last fall were reportedly “good, not great.” Independent businesspeople near the West Side store have mixed feelings about Wal-Mart’s Jobs and Opportunity Zone Program, with some worried about being run out of business while others are happy to have a big player’s presence in an economically depressed area. At the moment, the West Side store looks like it may remain Wal-Mart’s only Chicago experiment.

Another Olympic Game

February 29, 2008

The U.S. Olympic Committee (USOC) recently narrowed the field of cities competing for the new site of its 125-person headquarters to two, but final selection has been postponed at least until May. While USOC chief Peter Ueberroth refused to name the cities, the main contenders are reported to be Chicago and Colorado Springs, the latter being the current location for USOC headquarters. Ueberroth is demanding “bulletproof” proposals from the contending cities.

According to public documents released in response to a Colorado Springs Gazette lawsuit, the USOC’s main consideration is free (i.e., no leasing or acquisition costs) and bigger headquarters space. The present facility shares a cramped former Air Force base with USOC training facilities that will remain in Colorado Springs even if the headquarters moves.

Colorado Spring officials estimate USOC’s annual economic impact at $316 million. While it has not released all the details of the retention offer, fearing to be outbid by competing cities, the city has approved a special bond district that could provide a new USOC headquarters site $100 million in low interest bonds.

But state and local officials are also pushing back a little. Mayor Lionel Rivera responded to Ueberroth’s latest demand by saying “… our commitments are laid out and backed up and to use his term, ‘bullet-proof.’” Colorado’ U.S. Senators Ken Salazer and Wayne Allard have threatened to “examine” USOC’s federal charter if its headquarters leaves the state.

USOC may be using the three-city competition more to squeeze Colorado Springs than anything else, although Chicago’s superior air service and talent pool are reportedly attractive. According to news reports, Chicago has offered Navy Pier, a massive entertainment complex on Lake Michigan, as a potential headquarters site, but USOC is said to be more interested in the renowned but underutilized Sears Tower, which could be renamed if chosen.

While no other details of Chicago’s offer, including potential incentives, have been made public, officials think getting the USOC headquarters could bolster Chicago’s bid to host the 2016 Olympics. But having the headquarters will not help that bid much if the city does not make its aging and under-funded mass transit system more competitive with the efficient systems of competitors like Madrid.

Wisconsin Subsidizes Border Hopping, But Did It Need To?

February 20, 2008

Uline Shipping Supplies, a distributor of industrial packing materials, recently announced it will relocate its headquarters from Waukegan, Illinois to a new headquarters/distribution campus just 20 miles north in Wisconsin, for which it will receive up to $23 million in state and local business subsidies. The announcement has renewed debate in both states on the wisdom of providing such “incentives,” especially for companies taking a short step across state lines.

Uline will transfer 650 jobs based in Waukegan to Pleasant Prairie, Wisconsin, an affluent outlying suburb of both Chicago and Milwaukee. State and local officials have pledged $6 million in grants, credits and forgivable loans for the project, which is expected to create an additional 350 jobs in addition to the 650 transferred. Wisconsin has also designated the Uline campus an enterprise zone, providing up to $17 million in further tax breaks over 10 years.

The relocation is a blow to Waukegan, a small, economically depressed city in otherwise affluent Lake County. But, although Uline doubtless welcomes Wisconsin’s substantial public subsidies, it’s unlikely they are driving its relocation decision.

The key factor for Uline seems instead to have been finding a site big enough for both its headquarters and a new, much larger distribution center. Uline chief financial officer Frank Unick said the Pleasant Prairie site “gives us the opportunity to have significant space to accommodate future growth and to bring people together again who are currently located in a number of different Uline facilities.”

While Wisconsin’s subsidies might not have been a big factor in luring Uline across the border, Illinois’ own subsidies –whether in the form of tax benefits like Single Sales Factor adopted to attract headquarters and manufacturing (see February 6 blog below), or of the EDGE corporate income tax credits Uline has been awarded in recent years —were also ineffective in keeping the company from moving.

Costly Business Tax Break Fails to Check Illinois Manufacturing Job Loss– Again

February 6, 2008

In a move reminiscent of Maytag’s 2002 decision to close its Galesburg, Illinois plant and transfer jobs to Mexico, Methode Electronics has announced it will close one of its three Illinois plants and eliminate a product line at another. A total of 700 jobs at the three plants will be cut, with some positions transferred to Mexico or China.

Methode, a multinational supplier of auto components like turn signals, cited fewer orders from the Big 3 automakers and pressure to cut prices.

Job cuts like these underscore the ineffectiveness of the Single Sales Factor method of determining the income tax liability of companies that–like Methode–operate in several U.S. states. Illinois adopted in 1998,

By excluding in-state property and payroll from the formula that determines income taxable, SSF provides a tax windfall to large companies like Methode with substantial in-state presence and substantial out-of-state sales. Proponents claimed an economic development bonanza would offset the revenue loss, as SSF’s tax advantages would attract new companies and investment and create 155,000 new jobs in the manufacturing sector alone.

However, after eight years and an estimated cost to the Illinois treasury of nearly $750 million, SSF has proven ineffective in stemming the loss of manufacturing jobs in Illinois. In fact, manufacturing employment has fallen by nearly 219,000 jobs since the beginning
of 1999.