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"Race, Poverty and "Economic Development" Gone Haywire,"

by Greg LeRoy States and cities spend an estimated $50 billion a year in the name of economic development. Yet a growing body of evidence indicates this massive spending – often justified with anti-poverty rhetoric – is at best ineffective and at worst indifferent to concerns about reducing poverty and racial disparities in income.May/June 2004 issue of Poverty & Race

States and cities spend an estimated $50 billion a year in the name of economic development. Yet a growing body of evidence indicates this massive spending – often justified with anti-poverty rhetoric – is at best ineffective and at worst indifferent to concerns about reducing poverty and racial disparities in income.

The number and value of development subsidies has climbed sharply in the last 20 years, so that the average state now has more than 30 such subsidies of various sorts on the books, and deals providing more than $100,000 per job are old news. Subsidies typically include corporate income tax credits; utility sales and excise tax breaks; property tax abatements; loans and loan guarantees; enterprise zones; tax increment financing districts; training grants; and land and infrastructure subsidies.

Despite lofty rhetoric about reducing poverty that has been used to justify this proliferation, it is increasingly clear that the programs are not really benefiting those workers who need help the most. Programs that were targeted to pockets of poverty but have strayed from their original mission are glaring examples. However, the problem is hardly limited to such subsidies.

Early Evidence of Straying Subsidies

Beginning 20 years ago, a small but disturbing body of evidence began to appear that suggested development subsidies were being used by employers with discriminatory employment practices or by industries that were moving good jobs away from communities of color, or that affluent areas were getting most of the money.

For example, a 1984 analysis of industrial revenue bonds (IRBs, or low-interest loans) in the Chicago area found an adverse effect upon workers and minority entrepreneurs. The Illinois Advisory Committee to the U.S. Commission on Civil Rights examined 104 deals. In fully one-fifth, either the recipient company or the bank that bought the bond had recently violated the federal fair employment rules of the Equal Employment Opportunity Commission.

The same study also found that only 3 of the 104 IRBs went to African American-owned firms, one to an Asian-owned firm, and none to Hispanic-owned firms. At one-third of the companies, workforces had a much smaller share of black employees than the region’s labor market. Two-thirds of the companies also had disproportionately small Hispanic employment, and more than half had disproportionately small female workforces.

A 1998 study by the Woodstock Institute examined the geographic distribution of loans made under the Small Business Administration’s 504 loan guarantee program in the Chicago metro area and found that higher-income and outlying zip codes received more loans than lower-income and closer-in areas.

Several other studies found that incentive programs such as IRBs, intended to benefit distressed areas, more often go to prosperous jurisdictions. For example, a survey by the New York State Comptroller of 12 years of IRBs during the 1970s and 1980s found that just one county in affluent Long Island received 25% of the entire state’s supply of the low-interest loans.

Lack of Concern for Race and Poverty

In the last four years, several new studies, including two national surveys, have made it clear that the earlier findings were not isolated cases or statistical flukes. Collectively, they suggest that the rules governing development subsidies have grown so loose as to moot out any positive effects they may ever have had towards reducing poverty or racial disparities.

Perhaps the most egregious official hypocrisy in economic development concerns public transit. In speeches, statutory intent language or official findings they use to justify subsidies, legislators often cite the reduction of poverty as a specific purpose. Of course, families that depend on public transit to get to work because they cannot afford a car would meet most people’s definition of impoverished. So among the 1,500-plus state subsidy programs, one would expect that at least a few would be structured to help transit-dependent workers gain new job opportunities. However, a 2003 study by Good Jobs First, Missing the Bus, finds that not one of those 1,500-plus state subsidies requires – or even encourages – that a company getting a subsidy in an urban area locate the jobs at a site served by public transportation. (The standard definition of transit-accessible is a quarter-mile or less from a regularly served transit stop.)

In other words, despite the anti-poverty rhetoric, states are in fact completely indifferent to whether they are creating jobs accessible to people who cannot afford a car. Given that African-American households are about three and a half times more likely than white families not to own a car, and Latino households are about two and a half times more likely, the discriminatory bias of economic development in the U.S. today could not be clearer.

It’s a huge efficiency issue as well. States and cities spend about five times more a year on economic development than states spend on public transit. So if states adopted “location-efficient subsidies” requiring companies to locate jobs at transit-accessible sites, many good things would happen: More jobs would be created along transit routes so that low-wage workers would gain new job opportunities; all workers would gain more commuting options; and exclusionary suburbs would be prodded to open up and allow more transit routes.

Another 2003 study from Good Jobs First, Straying from Good Intentions, looks at how states have weakened the rules governing two geographically targeted anti-poverty programs: enterprise zones and tax increment financing (TIF). Both were originally restricted to areas with high rates of poverty, unemployment and/or physical blight. However the study found that over the past 20 years, 16 states have weakened their TIF laws and 11 have weakened their enterprise zone laws. That is, states weakened the geographic targeting rules, enabling TIF districts and enterprise zones to expand or migrate into affluent areas that were not originally intended to benefit from the programs.

For example, New York State permitted “Empire Zones” to double in size and then gerrymander into places that are not even contiguous to the originally designated high-poverty areas. Non-contiguous areas can be added to a zone if they are found to have potential for development, an extremely loose criterion. That has led to the creation of zones in areas that have low unemployment. Companies have also “gamed” the rules by creating a new entity within a zone, transferring jobs into it, and then getting tax credits for the “new” jobs in the zone. The Buffalo News found that many law firms and banks in the Central Business District were enjoying zone tax breaks, while jobs and investment were lagging in distressed neighborhoods.

A few states have so gutted their rules that they no longer make any anti-poverty pretense. For example, Arkansas, Kansas and South Carolina have declared their entire states to be enterprise zones. Louisiana no longer requires a company to locate in a depressed area to get zone credits, although some employees must live in zones.

Ohio no longer claims its huge zone program is for helping depressed areas; instead, its official purpose is to reduce business taxes and protect Ohio against subsidy competition from other states. The results of abandoning its anti-poverty intentions are already evident: A 2003 study by Policy Matters Ohio found that enterprise zones in high-income school districts receive five times more capital investment and twice as many jobs as those in low-income districts. It concluded that the “very areas [zones were] initially designed to help are now disadvantaged by the program....Ohio’s [zone program] has succeeded in making the playing field even more tilted against urban areas by extending to wealthier suburbs an additional fiscal tool with which to compete for firms.”

The same trends are evident in many states for tax increment financing, a device by which property taxes are diverted for long periods of time to subsidize redevelopment of small TIF districts. Originally targeted in narrow ways to reverse blight and abandonment, TIF has been watered down to a generic economic development tool in Alaska, Georgia, Indiana, Iowa, Minnesota, Mississippi, North Dakota, Utah and Virginia.

For example, Minnesota has more than 2,100 TIF districts – diverting more than 8% of the state’s entire property tax base – yet less than a fourth of the districts have blight. The wealthy Chicago suburb of Lake Forest has a TIF district – and a Ferrari dealership!

Taxpayer-Subsidized Corporate Relocations

Multi-state competitions for high-profile projects such as auto assembly plants receive lots of media attention. But far more common are companies simply relocating within a metro area – relocating in a sprawling way that exacerbates concentrated poverty and racial disparities by moving jobs away from neighborhoods of color and pockets of poverty. Many studies have shown that the dispersion of jobs from central city to suburbs has disproportionately harmed minority and low-income workers because they face barriers finding housing in the suburbs. One case study examined a company’s relocation from downtown Detroit to suburban Dearborn. After the relocation, the center of employee residence locations shifted, mirroring the company’s move. Some employees moved closer to the new workplace; others quit. Black workers were more likely to quit, in part because of barriers to residential relocation.

Another study examined the distant Minneapolis suburb of Anoka. In the mid-late 1990s, it used TIF to fund a 300-acre industrial park and offer free land to light manufacturing companies that would relocate there. The lucrative offer landed 29 companies and about 1,600 jobs. All of the companies relocated to Anoka from within the Twin Cities region, mostly from Minneapolis and old, inner-ring northern suburbs. Overall, the relocations moved jobs and opportunity away from the region’s poorest neighborhoods, and away from people of color. They also moved jobs away from the region’s largest pockets of welfare dependency – even as “welfare reform” was pushing many people into “work first,” take-any-job routines. Low-wage workers without a car also lost opportunity: Before the relocations, 70% of the jobs had been accessible by public transit, but in Anoka they are not. Only 40% of African-American households in the Twin Cities region owned a vehicle in 1990.

A few journalists have also begun to make the subsidy-sprawl link. A 1995 Kansas City Star series cited several cases of prosperous suburbs giving tax breaks to companies leaving depressed core areas. The paper found the deals particularly galling because the tools being used by the wealthy suburbs were originally intended to help central cities. “Created to combat sprawl, tax breaks now subsidize it,” the Star concluded. A 1999 series in the Milwaukee Journal Sentinel cited a mutual fund company in suburban Menomenee Falls which received a $3 million tax credit. The deal was justified because it is “close to Milwaukee County, which continues to have higher unemployment than the state average.” A state senator commented: “[i]t’s essentially a government subsidy to promote sprawl.”

These many cases beg the broader regional equity issue: Since suburban sprawl already gives newer areas so many advantages, why should any development subsidies be allowed in them? As one Twin Cities civic wag put it: “Subsidizing economic development in the suburbs is like paying teenagers to think about sex.”

With states and cities facing their third consecutive year of fiscal austerity – and more lean years ahead if the Bush-era federal tax cuts become permanent and then flow down to the states – there may be a chance to win greater scrutiny of corporate tax breaks. Reforming them so that they really reduce poverty and racial disparities – getting back to basics – is a winning argument.

Greg LeRoy directs Good Jobs First, a project of the Institute on Taxation and Economic Policy (1311 L St. NW, Wash., DC 20005; 202/737-4315). He is author of No More Candy Store: States and Cities Making Job Subsidies Accountable, published by ITEP, and 1998 winner of the Public Interest Pioneer Award of the Stern Family Fund. All of the Good Jobs First studies mentioned in the article are on their website and available (free) from the author.

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