economic development – Page 2 – The Menace of Privilege

Hey Bruce! Mike! Here’s a few bucks for the deficit… or something.

For a full-sized (23.4mb!) copy of this cool Illinois Coal Industry Map produced by Illlinois State Geological Survey, click the image — For a full-sized (23.4mb!) copy of this cool Illinois Coal Industry Map produced by Illinois State Geological Survey, click the image

En route to writing something else, I discovered that the Center for Tax and Budget Accountability published a report last fall suggesting that Illinois might want to impose a severance tax on coal. I was surprised to learn that we didn’t already have such a tax, but encouraged that somebody is looking into it.

The report looks into severance taxes in several coal-producing states, suggesting that Illinois might raise anywhere from $1.6 million to $128.8 million, which might be shared with local governments, used as general revenue, or put into a permanent fund, or some combination. The numbers are pretty modest in the context of a state budget short by $4.6 billion for just the current fiscal year, but that’s no excuse to ignore them.

I did note a couple curious things in the report. On page five it asserts that, since most Illinois coal is consumed in other states, consumers in those states would pay most of the tax. I rather doubt that any consumers would pay it. Rather, since the coal market is national, implementation of a significant severance tax here would just reduce the value of coal deposits, so the tax would be paid by the owners or lessees of coal rights.

Second, there’s no discussion of existing real estate tax as it applies to coal deposits. Per 35 ILCS 200/10-175 it appears that coal rights, if not yet developed, are taxed on a value not to exceed $75/acre, practically a negligible amount. That’s an extremely cheap way for speculators to hold rights waiting for a price increase. But, per 35 ILCS 200/10-180, coal which is actually being mined is assessed much higher, based on its actual economic value as defined in the statute. So there’s already a substantial incentive not to mine the coal. A proper analysis would consider how a severance fee would affect this assessment, both in terms of revenue and incentives to mine or not mine.

Suppose Northern Illinois University, all its students, staff, and buildings disappeared

NIU campus scene. Credit: EarlRShumaker via flickr (cc)

Well, then, that would reduce economic activity in the region. On that basis, the University estimates the impact would be $900 million annually. That’s figured by counting staff salaries, student expenditures, capital improvements, and the multiplier effect of each.

But of course this is a phony argument, intended to maintain the flows of tax dollars to the state’s “higher education” system. Let’s just suppose that all government funding of the University stopped. Quite possibly it could remain in operation, as lots of nongovernment schools do. But suppose otherwise. Tomorrow morning we wake up and find that Northern Illinois University is going out of business. And, just to keep the exercise meaningful, suppose none of the other Illinois government schools are able to pick up the slack; maybe they went out of business too, or maybe they just won’t expand.

So now there’s a big campus for sale. Would a nongovernment school want to buy it? Or maybe one or more other organizations, such as a mental hospital, retirement community, corporate think-tank, drug rehabilitation center, penal facility, religious group, will want to buy the space? The campus won’t remain empty. It will be re-used or redeveloped, and that will involve an unknown (but positive) number of jobs and investments.

What about the students? It seems the economic return on college credentials is decreasing, but surely it has some value for some people. There are lots of colleges, public and private, looking for students. Some students will decide to put full-time formal education aside for a time, look for jobs or start businesses. And starting a business might be a good idea, with a labor force suddenly available.

And the faculty? Surely they’re employable, as consultants or teachers elsewhere, or doing something else. If they really can’t do anything but teach at a government school, what necessary skills do they lack?

Meanwhile, we also need to consider the benefit to taxpayers of no longer funding the University. How much would they save? Or, more likely, taxpayers would “save” nothing, but more funds would be available to cover other existing obligations, which does seem to result in some public benefit.

One more thing. This topic was raised by a link in an email I received, labeled “What’s a state university worth to the region in which it’s located?” That’s kind of meaningless; do we mean “to the people living in the region,” or “to the taxpayers of the region,” or “to the owners of land in the region,” or something else? And necessarily, the analysis needs to imagine what would happen in the absence of the university. Do there exist any examples of a significant state university shutting down? I know of none. Perhaps a test is needed. Maybe I shouldn’t be surprised that Cold Spring Shops hasn’t commented on this.

How you can get the story right about TIF’s

Civic Lab has a Crowdfunding project to create a series of videos explaining Tax Increment Financing in Chicago. I’m confident they’ll do a good job of describing what’s wrong and why TIF’s, in anything like their current form, are detrimental to sound economic development. I’m a bit concerned about their proposed fifth video: Alternatives to TIFs. Do they understand that the way to prosperity starts by looking at what the proper function of government is, and the proper way to fund government?.

Once we recognize that government should be funded by collection of economic rent, which in a well-run city is largely land rent, we can see that elimination of taxes on productive activity will make all kinds of enterprises viable, quite likely causing a labor shortage which is they key to prosperity for working people. I don’t know that this message will get thru in the video, but the project offers a way to do it.

According to the web site, for $1,000 you’ll get a chance to express your own idea in their video. You could simply say that proper role of government in economic development is to collect the rent, protect the environment, build the infrastructure, operate the natural monopolies, and stay out of the way. Just a thought for prosperous Georgists.

Local land prices show that location still matters

taken about 8 years ago by Zachary Korb, via flickr (cc) — A different vacant parcel, about 8 years ago by Zachary Korb, via flickr (cc)

Crains reports the sale of a vacant parcel in the fashionable North State Street neighborhood for $70 million — $4075 per square foot. The article says that “Under a zoning agreement the city approved in 2006, a developer could build as many as 261 residential units on the parcel,” which would work out to about $268,000 land cost per unit. You can buy a nice residential lot in many decent neighborhoods for a lot less than $268,000 (and in less-decent neighborhoods land is practically free). Perhaps the buyer is expecting to obtain an increase in permitted density.

The article also reports that the seller, a “Miami-based developer” who has held the parcel only four months, will realize a $42 million profit. It’s unfortunate that none of this profit goes to support the intensive and expensive infrastructure which helps keep the neighborhood functional.

Two dumb tax policies give Aussie millionaire a bite of your lunch

Image Credit: Marshall Astor (cc) via flickr

From Crains we have a report that McPier — the Metropolitan Pier and Exposition Authority which controls McCormick Place and Navy Pier — has paid $5.5 million for about half an acre which sold last year for just “over $1 million.” It seems to be an awfully nice profit for Drapec USA, the California-based Australian real estate operator who earlier was expected to develop the property themselves.

I don’t know that this deal was in any way particularly corrupt or dishonest. Maybe the parcel actually quintupled in value over 14 months. Or maybe Drapec really has better “analytical and negotiating skills in finance and real estate” than McPier (or the seller last year, BMO Harris). But there are two things I do know:

(1) The multi-million dollar profit will be paid by everyone who patronizes restaurants in or near the central part of Chicago, where McPier imposes a 1% tax on all meals. To keep the math easy, figure the average fast-food meal costs $5.50, yielding 5½¢ for McPier. At that rate, it’ll take a hundred million meals to buy this real estate. Of course, McPier has other tax revenues, too. And actually, not quite all meals are subject to the tax, since some nonprofit organizations, as well as governmental agencies including McPier, are exempt.

(2) The asserted purpose of McPier is to “strengthen the local economy.” Why should the economy need to be “strengthened?” What are the obstacles preventing people from finding productive employment? Certainly one of these obstacles is taxes, not only the amount of taxes paid but also the difficulty and expence of conforming to all the applicable tax rules and regulations. Another, perhaps more important obstacle, is the vacant and underused land throughout the City. Land can be forced into productive use by collecting its full economic value through a land value tax. Since nothing can be produced without labor, productive use means wages will be earned. That is the way to strengthen the local economy. Of course, under a full land value tax, the selling price of that half-acre parcel near McCormick Place would be nominal, and Drapec would not have bought it unless they planned to begin development promptly.

Low wages mean low productivity

[L]abor is most productive where its wages are largest. Poorly paid labor is inefficient labor, the world over…. The efficiency of labor always increases with the habitual wages of labor—for high wages mean increased self-respect, intelligence, hope, and energy.

–Henry George (Progress & Poverty, Book IX, Chapter 2)

George gives plenty of examples from his time, but modern examples abound too. I happened on a 2006 article (pdf) by Wayne Cascio comparing how Sam’s Club and Costco treat their labor. The short answer is: Costco treats their workers much better, including higher wages, better benefits, and more job security. And, the article continues, the results are consistent with Henry George. Based on 2005 data,

Costco’s hourly labor rates are more than 40 percent higher than those at Sam’s Club ($17 versus $10.11), but when employee productivity is considered (sales per employee), Costco’s labor costs are lower than those at Sam’s Club (5.55 percent at Costco versus 6.25 percent at Sam’s Club).

Similar differences are cited in sales per square foot, and operating profit per employee. Obviously, the figures nearly a decade later would be different, but I suspect the comparison would be similar.

Land sales price vs. what is paid for land

In order to fund community needs from a tax on land value, assessors need to estimate what that land value is. Conceptually the task need not be difficult (Ted Gwartney outlines some options here, but a more complete and still-valid examination is in this book.) Basically, you look at sales prices for actual land transactions, and make adjustments for parcels which haven’t sold recently or where land comprises only a small part of the value. But what happens if the buyer pays something additional, “off the books,” for the land?

According to Peter Katz, that seems to be what often happens. This presentation at APA last March starts off slow (and self-promotional), but moves along thru some interesting territory. Regarding the price of vacant land, he asserts that, in many desirable areas, developers have to first buy (or option) the land, then negotiate with local authorities to get permission to build. Getting that permission might require agreeing to donate money (or land) for public use, or perhaps less savory expenditures, and to the developer this is part of the cost of land. If an area of any size is subject to such constraints, all the land sales are below market prices by the amount of such costs, and all sites, whether sold or not, receive assessed land values that are lower than what developers actually pay to get a buildable site. This results in less public revenue, implying a need for other taxes, as well as a tendency to develop at lower densities than might be appropriate, when developers choose to settle for existing zoning rather than what they might be able to negotiate. Katz suggests that a formal study of this effect should be done, and nominates Lincoln Institute to make it happen.

Katz’s remedy seems to be a combination of form-based zoning codes, plus a sophisticated (and presumably accurate) fiscal impact analysis that might show denser development to actually be more “profitable” to governments. But, responding to a question about 65 minutes into (and near the end of) his talk, he acknowledges that funding government from a land value tax would be a good way to obtain the desired development pattern, and that Henry George was a great guy. His observation that Georgists tend to be wacky has been made before, and I can’t say it’s wrong.

Quid Pro Brew

image credit: Bernt Rostad (cc) via flickr

I was wondering a few weeks ago why Revolution Brewing supported the lobbyist-friendly “Transit Future” funding effort. How foolish I was, is not brewing a regulated industry desirous of government favors? WBEZ reminds us of the “Small Brew Act,” which would cut the federal taxes on the first 60,000 barrels produced. Senator Kirk, who has never done anything constructive that I can recall, toured the ~~Lobbyist~~ Revolution Brewery and spoke kindly of the act.

Of course, there is no just reason to impose any tax on production of beer or anything else people want, provided that land rent is collected by and for the benefit of the community. In the same situation, I might do the same thing Revolution has done, especially if I knew more about political strategy and good beer than about smart fiscal policy and public finance. But it’s a shame they’re doing it.

America Fast Forward to Transit Future Obligations

Over here in Illinois a coalition of powerful and dangerous people and organizations seems to be supporting a “transit future” initiative to harvest a “robust revenue stream,” inferentially a further increase in the sales tax. I say “seems to be” because I haven’t verified that everyone listed (including southern California’s moveLA) is in fact a supporter rather than a typo. And “inferentially” because the examples cited on the site involve sales tax increases.

GETTING TO HYDE PARK…

There is some fancy mapping at vision.transitfuture.org Continue reading America Fast Forward to Transit Future Obligations

What the Tribune missed

iTax Dodge protest — image from Michael Casey via flickr (cc)

Last year the remnant of the Chicago Tribune requested ideas for elements of a new “Plan of Chicago.” They even posted a few of the responses on their site. I suppose some were included in the hardcopy newspaper too. But those don’t seem to have included my submission, so I probably ought to post it here.

My proposal, of course, relates to how public revenue is raised. The protesters pictured on the right probably wouldn’t realize that it relates to their concerns, and would almost certainly cause Apple to make a greater contribution to local coffers than they do now. But it wouldn’t increase any corporate tax rate nor prevent Apple from playing accounting games. It doesn’t need to.

Here’s the proposal as submitted on October 24 2013: Continue reading What the Tribune missed