Theory and Applications in Economic Development

1. Theory and Applications in Economic Development Guest Lecturer: Hans Zigmund DePaul University PPS 329/359 Special Topics: Applied Urban and Environmental Economics

2. Defining Economic Development Politicians Expansion of the tax base. (especially in the local arena) Jobs Economists Employment Growth Growth in GDP/Capita For states this is GDP By State/capita (formerly known as gross state product or GSP/captia)

3. Theories of Economic Development Neo-Classical Growth Theory (Solow) Stresses the importance of savings and capital. Aggregate Growth (or development) refers to increases in total production. Human capital as well as physical capital can provide income over time. (incentive to invest in citizens) Sources of growth include. The quantity and quality of labor Capital stock Technology

4. Theories of Economic Development Critique of Neo-Classical Growth Theory Assumes perfectly competitive markets Assumes flexible wages and prices Assumes the level of technology is the same throughout the world and that the level of technology is determined exogenously (outside the model).

5. Theories of Economic Development Endogenous Growth Theory (Lucas) Human capital would not be mobile if technology was the same everywhere. Corrected for problem of technology being the same throughout the world. Changed growth model to determine the level of technology with in the model. Innovation or Technical Progress variable

6. Theories of Economic Development Critique of Endogenous Growth Theory The rate of technical progress in the model is not explained by changes in factors of production. R&D spending not and adequate measure of technical progress. It may not yield any growth. LDC�s could increase productivity with out any R&D, but by simply using existing technology.

7. Alternative Measure of Economic Development Human Development Index United Nations Development Program(UNDP) Index Indicators Longevity (Proxy for health and nutrition) Average Life Expectancy Educational Attainment Real GDP/captia in PPP$. Rankings available at: http://hdr.undp.org/reports/global/2004/pdf/hdr04_HDI.pdf

8. What we can learn from HDI Economic development is not as monolithic as economic growth theory suggests. A combination of measures may be a better approach than a single metric such as GDP.

9. Defining Economic Development Improvement to the general quality of life in a community. Healthcare Education Employment and wages Distribution of wages and wealth Environment Production Capacity Access to Goods and Services Infrastructure

10. Role of Finance in the Economy Foster an environment where investment can take place. Providing marketplaces Bonds Stocks Venture capitalists Providing other Financial Intermediation (Banks) Brings together innovators and financiers.

11. Sources and Types of Financing Debt Financing Loans Bonds General repaid in set increments over time with interest Debtors are paid first Equity Financing Claim on residual cash flow (dividends) Dividends vary with success Higher risk

12. Sources and Types of Financing Public Investment profession sees NASDQ and NYSE as public markets. To policy people, public means government activities Private Investment information is closely held. Private sector (non government)

13. Sources and Types of Financing The shades of gray in between Not-for-profit (in the IRS sense) Non Governmental Organizations (NGO�s) Community Development Corporations Local business Organizations Social Groups

14. Public Intervention Provide public goods Infrastructure Provide a legal system Property rights Contract enforcement Criminal law and enforcement Provide for Taxation and Fees To pay for expenditures Shape behavior Impact fees Relieve traffic congestion (Toll Roads) Sin Taxes

15. Enterprise/Empowerment Zones (EZ�s) Purpose: Respond to a lack of economic development in a given geographic area by creating job opportunities. Generally a complex set of incentives. Tax incentives (most popular) Investment Tax Credits (ITC) Job Credits Regulatory Relief Social Services New Infrastructure

16. Enterprise/Empowerment Zones Justification Justification for targeting a small area Jobs have been suburbanized, but poor, generally minority urban areas have not. Economic development policies have more impact in poor/high unemployment communities as opposed to wealthy ones. (Timothy Bartik, 1991)

17. Enterprise/Empowerment Zones Effectiveness Do Enterprise Zones induce jobs? But for? Literature is mixed. Alan Peters and Peter Fisher studied 75 enterprise zones in 13 states. Microsumulation model using company financial statement data and state tax and incentive structures. Incentives probably too small to change firms location decisions. Incentives are highly costly to government. Do Enterprise Zones induce the right kind of jobs? Not known due to data constraints.

18. Tax Increment Financing Defined Allows a municipality or development authority to: Designate an area for improvement Earmark future growth in property tax revenues to pay for development expenditures.

19. Tax Increment Financing Criteria Development would not take place but for the TIF Area must be blighted Tax Increment Allocation Redevelopment Act (65 ILCS 5/11-74.4.1) and the Industrial Jobs Recovery Law (65 ILCS 5/11-74.6-5, Must meet at least 5 criteria. dilapidation obsolescence deterioration minimum code violations illegal use of structures Deleterious (harmful or unhealthy) land use excessive vacancies inadequate utilities lack of ventilation or sanitation, Overcrowding environmental cleanup.

20. Tax Increment Financing (Basic Mechanics) Freeze Assessed Valuation at the base year level for the life of the TIF (23 years in IL). Issue bonds to pay for infrastructure improvements. Make infrastructure improvements to attract development. Use revenues from the tax increment from increased property values to pay off the bonds.

21. Tax Increment Financing: The Debate School Districts (and other overlapping taxing districts) Generally claim that they are losers in the TIF Assessed valuation would have increased at some rate within the TIF district during the life of the TIF. The additions to tax revenue attributed to this natural rate of appreciation are not really part of the increment created by TIF. �Therefore these revenues should really have been paid to the overlapping taxing bodies.

22. Tax Increment Financing: The Debate In 2001, Fremont School District 79 and Mundelein High School District 120 filed suit against the Village of Round Lake Park, Illinois. The village lost the court case and ultimately the land that was in the TIF in a subsequent case.

23. Tax Increment Financing: The Debate Municipalities claim that the development would not take place but for the TIF. TIF is used as a way of smoothing cash flows. Revenue bonds are issued upfront to pay for the improvements needed to encourage development. Future revenues are used to secure the bonds for current spending.

24. Literature Review, why use TIF? Anderson (1990, 155) discovered a significant relationship between estimated changes in property values and the likelihood that a Michigan municipality adopts TIF. Man (1999, 1151) finds that municipalities which experience decreases in state aid over three consecutive years are likely to adopt TIF and further predicts that a municipality is more likely to adopt TIF if it experienced a property tax increase in the previous year.

25. Literature Review, Effectiveness of TIF? TIF may not be viable for truly blighted areas with decreasing property values. (Dye et al, 1998 102) TIF may be most effective in the areas it is least intended to be used. Weber, Bhatta and Marriman investigates whether or not TIF raises urban industrial property values. There is a moderate (R2 range .41 to .54) and statistically significant (p=.05) relationship between unimproved industrial property values and TIF status. (Weber et al. 2003, 2008-2013) Examining the effects of TIF adoption on changes in property value in Indiana municipalities shows increased property values in TIF adopting Cities over non-TIF adopting cities. (Man et al. 1998, 541)

26. Literature Review, Impact of TIF on overlapping tax districts? �Municipal use of TIF appears to contribute to schools slow growth in property tax dollars�but the state school aid formula also appears to compensate for those districts that were not able to meet there educational obligation.� (Weber 2003, 638)

27. Tax Increment Financing: Suggestions for Reform Minnesota currently requires the original tax capacity (base assessed valuation) to be adjusted by the property tax inflation rate in the district. Compensate school districts when development leads to an increase in the student population Municipalities can require the developers to pay the up front cost and then reimburse them with the increment, thus shifting the burden of risk. (Chicago often does this)

28. Tax Increment Financing: Illinois Statistics As of January 2006 389 municipalities with TIF. 998 TIF districts state wide. 140 TIF�s in the City of Chicago. The next largest users of TIF are Bellevue and Rockford tied with 13. The smallest community with a TIF is Wilmington population 128. Lake Forest, Lincolnshire and Barrington all have TIF�s. There median family incomes are $165,500, $150,600 and $102,000 respectively (2000 Census in1999$).

29. Applications: Sports Facilities and Casino Gaming Why discuss these specific applications? They are at least a little fun and interesting. They are popularly sold as the center piece of an economic development package.

30. Factors Influencing Plans for a Sports Facility Sports teams are private enterprises, why should there be public finance involved? Commonly cited Public and Private Benefits Attract investment in related businesses. Attract new business and retain old. Revitalize downtown. Intangibles: Community image, excitement, prestige. Unify region�s sports fans.

31. Factors Influencing Plans for a Sports Facility: Market Structure Assume it is true that sports teams benefits to the community that warrant public investment. Does the market structure argue for or against public investment? Argument for a competitive market. (Owners and League Representatives) Entertainment substitute goods. Must play well. Must attract and retain talent.

32. Factors Influencing Plans for a Sports Facility: Market Structure Argument for a protected market. Market forces do not control the supply and location of sports teams. Supply and location are controlled by MLB, NFL, NHL, and NBA. (similar to a cartel) If the supply is restricted, there will be more cities that want teams than teams available. Price of a team increases. (Sox move to St. Pete�s)

33. Factors Influencing Plans for Sports Facility: Status in Society Are sporting events just another form of recreation? No substitute for the Bulls, Bears, and Sox (sorry Northsiders)

34. Factors Influencing Plans for a Sports Facility: Facility Type Baseball Parks: Smaller (45,000), better views of the infield. (Miller Park $322M) Football Stadiums: Larger (70,000), view designed to see the entire field. (Soldier Field Renovation $365M) Arenas: Smaller (20,000), multiuse facilities Basketball, hockey, boxing, concerts, wrestling. Most profitable, many host 200 events/year. Lowest cost to build. (United Center $150M)

35. Factors Influencing Plans for a Sports Facility: Owner Goals Make a profit (Tribune Corp and the Cubs) Invest to win (George Steinbrenner) Promote their product or primary business (Anheuser-Busch and the St Louis Cardinals or Ted Turner and the Braves)

36. Factors Influencing Plans for a Sports Facility: Financing Tools General or broad based taxes. Arlington TX increased the sales tax for new Rangers Park. Specific Consumption Taxes e.g. sin taxes, parking taxes, restaurant taxes. User Fees (Paid by fans) TIF Sports Taxes (Paid by athletes)

37. Public Private Partnerships

38. Casino Gaming The Illinois Riverboat Gaming Act was enacted in 1990 making IL the second state to legalize riverboat gaming. Authorized 10 licenses Current boats are in Alton, E. St. Louis, Metropolis, Peoria, Joliet (2), Aurora, Elgin, and Rock Island. The 10th license is vacant.

39. Understanding the Language of Casino Finance Adjusted Gross Receipts (AGR) - Casino gross gaming receipts minus winnings paid. Also called casino win. EGD�s - electronic gaming devices (slot machines, video poker) Drop � Amount collected in EGD drop bucket or table drop box. Handle � Total amount wagered. (EGD only) Position � Each IL casino is allowed up to 1,200 gaming positions based on the following formula EGDs � 90% of the total available for play Craps � 10 per table Other table games � 5 per table

40. Understanding the Language of Casino Finance: Tax Structure Wagering Tax 15% of AGR up to and including $25million 22.5 % of AGR un excess of $25million but not exceeding $50million 27.5 % of AGR un excess of $50million but not exceeding $75million 32.5 % of AGR un excess of $75million but not exceeding $100million 37.5 % of AGR un excess of $100million but not exceeding $150million 45 % of AGR un excess of $150million but not exceeding $200million 50% of AGR in excess of $200 million. *Base payments between $31mil (Alton) and $198 mil (Elgin)for 8 of 9 boats ** Local share equals 5% of AGR

41. Understanding the Language of Casino Finance: Tax Structure Admissions Tax $3 per person for all boats except Rock Island where it is $2. $1 goes to the host community.

42. Casinos as a development tool 2006 State share of gaming taxes $717mil 2006 Local share of gaming taxes $112mil Acts as an anchor of development bringing new businesses and development to the community. Creates jobs.

43. Critique of Gaming as Effective Economic Development Social costs of increased crime and gambling addiction. Cost > Taxes (NCALG) Drain on resources "(Gambling) involves simply sterile transfers of money or goods between individuals, creating no new money or goods. Although it creates no output, gambling does nevertheless absorb time and resources. When pursued beyond the limits of recreation, where the main purpose after all is to kill time, gambling subtracts from the national income." Paul Samuelson, Nobel Laureate in Economics Not all casinos are created equal.

44. Case Study: Elgin and the Grand Victoria Downtown TIF and several enterprise zones (investment tax credits, property tax abatements and sales tax waivers) were used in conjunction with the Grand Victoria Casino to revitalize Elgin.

45. Case Study: Elgin and the Grand Victoria: Results Grand Victoria created 1,600 jobs Provides $1.5 million/month in city tax revenue. City created a $200 senior property tax rebate and repealed $25 vehicle license fee. City estimates that 537 new employers invested $242 million between 2000 and 2003.

46. Case Study: Elgin and the Grand Victoria: Results Grand Victoria is probably successful more because of demographics than anything else. It is difficult to tell which incentives created what growth. Would the growth have taken place but for the incentives?