Monday, July 25, 2016

More on Henningsen and the Enterprise Zone

Over on Facebook there's more discussion of the Enterprise Zone tax abatement incentive program.

Councilor Bennett says
there's no cost to the taxpayer when nothing is built. It's a huge benefit when something is....

The 5 year tax abatement has no impact on anyone when you realize that no taxes will be collected if nothing is built. In five years the building goes on the tax roles. Recall it also is the first of three phases. In earlier work at another site this company promised 29 jobs and delivered over 40. This also is a major addition to the infrastructure serving our food processing industry and the jobs it will create and buildings it will build as a result of this project. [italics added]
The argument here is that there's a basic mistake or omission in the dimension of time. Here's the Strong Towns critique (written by an civil engineer, by the way):
the local unit of government benefits from the enhanced revenues associated with new growth. But it also typically assumes the long-term liability for maintaining the new infrastructure. This exchange — a near-term cash advantage for a long-term financial obligation — is one element of a Ponzi scheme.

The other is the realization that the revenue collected does not come near to covering the costs of maintaining the infrastructure. In America, we have a ticking time bomb of unfunded liability for infrastructure maintenance. The American Society of Civil Engineers (ASCE) estimates the cost at $5 trillion — but that's just for major infrastructure, not the minor streets, curbs, walks, and pipes that serve our homes.
This is the nut of the matter.

The green field development on the edge of the city creates new business and some amount of new property tax revenue.

But crucially, because it requires wholly new infrastructure to service, it also creates a large amount of future maintenance and replacement obligations.

If we were already current on our maintenance obligations, this would largely be moot. But since we are seemingly not able to replace old lead pipe, make sure we have complete sidewalks in good repair, make sure our bridges and government buildings are in good repair and will withstand the expected major seismic event - you just go down the list of current obligations we are not meeting, and you have to ask, why are we then creating new obligations we already know we cannot meet.

The way we look at these subsidy programs does not include a full life cycle analysis, and does not therefore look at how truly sustainable they are.

Now, maybe you object that Strong Towns is an advocacy organization. Here's the New York Times with similar, dove-tailing analysis on larger companies:
A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid....

A portrait arises of mayors and governors who are desperate to create jobs, outmatched by multinational corporations and short on tools to fact-check what companies tell them. Many of the officials said they feared that companies would move jobs overseas [or out of the area] if they did not get subsidies in the United States [or in Salem].
What objective assurances do we have that Henningsen wouldn't be expanding without the Enterprise Zone abatements? For City officials this seems to be an prior assumption rather than something proved.

Madrona and 25th plan concept - July 2015
Even near term there are elisions. In the appeal to all the jobs at the new Madrona facility, we elide the fact that in addition to the Enterprise Zone abatement, there is also the $6 million subsidy involved in the Madrona and 25th Street widening. This project wouldn't have happened without the Norpac/Henningsen expansion, and so it is reasonable that the largest portion of its cost should be "charged" to the Norpac/Henningsen redevelopment and considered a public subsidy.

It may not be possible to say Councilor Bennett is exactly wrong, but it seems like the current analysis of Enterprise Zones is short-sighted and quite thin, and that the citizenry, and electeds who represent them, should want a more robust kind of analysis on the subsidy programming. It is an article of faith that they are effective and wise - Jobs! after all. But it would be nice to have a real, detailed argument for them.

Salem should invest in agriculture. It's the right thing for our region. So it would probably be an exaggeration to call the Henningsen project any kind of boondoggle. But it's also probably true that it's not as efficient an investment as it looks on the surface. And it certainly true that citizens don't have adequate information to determine for themselves how good or bad an Enterprise Zone investment really is.

Continuing the Conversation - Postscript and Addendum
(Facebook is unfortunately optimized for a single photo and caption, or for a single paragraph. It's just not possible in FB to respond in detail or with any nuance. It's also very awkward for outside citations.)

Over on Facebook, about this post Councilor Bennett writes
Interesting discussion but I would suggest under the reasoning in this, bicycles owners and riders would be paying a substantial use fee for bike lanes, boulevards, etc. And this reasoning would also extend to pedestrians and other types of infrastructure users.
This isn't exactly on the merits of the critique of Enterprise Zones, but since it's a common sentiment and objection it deserves a full answer.

When auto users start to pay the full cost of auto infrastructure, it could be appropriate to talk about more fees on some bike users. But bike users currently subsidize auto users, however.

Remember that the $100 million 2008 road bond is funded by taxes on homes and property, not anything associated with cars or car use. More generally in a national perspective, note the red line in the chart from the Pew Charitable Trusts below. The more local you get, the fewer car user fees are associated with road work. But even nationally, there's still a funding gap. Bike users who rent, who own a car, or who own a house - that is, most of them - are subsidizing auto use in the transfer. (See also "Who Pays for Roads?" and "Do Roads Pay for Themselves?")

User fees leave big funding gap; cost shifting
to home-owners and renters
(Pew Charitable Trusts, red notes added)
But also because of the negative externalities associated with auto use, the appropriate public policy is to subsidize biking and walking. Here's an actual university economist on this.
Perhaps the stupidest public policy idea I have ever heard of is the proposed bike tax. It is not worth talking about the proposal itself as it is not going anywhere and is, as I think I mentioned, stupid. But what is interesting to me is that, in fact, the appropriate public policy is to subsidize bikes, not tax them.

Why? The negative externalities associated with bike riding: virtually none. Minimal wear and tear on roads, sometimes a slight slowdown in traffic and a extra line of paint for a bike lane. Positive externalities associated with bike riding: lots. Reduced congestion and emissions from those that bike in lieu of taking a car, and better health and fitness of riders reducing the toll on the public health system. Public economic teaches us that to get an efficient amount of economic activity that has externalities you have to get the price to reflect the true cost of the activity. In this case the true cost is less than the price of a bike.
This same argument holds true for walking, of course.

A full life cycle analysis, and "least cost" analysis of infrastructure for walking and biking would arrive at a very favorable return on investment.

Here is a thought experiment from a while back that illustrates a different way of looking at some of this.

If the City just outright purchased a $2,250 battery-assist e-bike for every person in West Salem (all 24,239 of them in 2010) and added a substantial gear allowance of $500, that in total would cost less than $67 million. (You could trick out the package even more of course.)

Right now we are talking about a $500 million bridge and highway to accomplish the same thing. You could subsidize free e-bikes for every person in West Salem for 1/10th the cost of the giant bridge and highway!

Investing in walking and biking is an order of magnitude (or more) cheaper than investing in car trips.

The city of Portland estimated back in 2010 or so that their entire bikeway system at that time would cost about $60 million to replace. They also noted that $60 million was about the cost of one mile of urban freeway.

Car-oriented development on the edges of cities is vastly more expensive than investing in biking and walking.

And significantly, from the standpoint of the City budget itself, the property tax efficiency is also an order of magnitude higher on streetcar-scaled (that is, walkable and bikeable!) downtown midrise development. Downtown midrise development generates 10x the property tax/acre of big box style greenfield development on the edges of a city.

Mid-rise downtown development generates 10x
property tax/acre over suburban big box sprawl
(see here for discussion and image credit)
So for all these reasons, it is not accurate to say "under the reasoning in this, bicycles owners and riders would be paying a substantial use fee..." It seems like it is too easy to get side-tracked by the culture skirmish over images of "cyclists" and miss the fact that investing in new car-oriented development is intensely inefficient and creates more problems than it solves.


Walker said...

Good place to remind people to reserve Wednesday, 5 October to participate in StrongTowns events here in Salem, with Chuck Marohn himself. He is spending two days up in Portland and then coming down to have a look at Salem and spread some of the StrongTowns gospel.

Salem Breakfast on Bikes said...

Updated with additional conversation with Councilor Bennett.

Anonymous said...

In a similar way that projects are subject to environmental reviews, city projects should have life-cycle reviews that reveal expenses, expected revenue streams and particularly future maintenance and replacement responsibilities assumed. This would increase transparency in the use of public funds. Councilor Bennett behaved poorly by avoiding addressing your points and instead using a diversion to another topic. This is unbecoming for a councilor.

Salem Breakfast on Bikes said...

The environmental/life-cycle review seems like a fruitful comparison! Thanks for making that.

Farther down in the thread, Councilor Bennett writes: "The amount of property taxes you pay don't cover the full cost of police and fire services. If we don't have economic growth, which is encouraged by these short term abatements, there is not new construction and therefore no new taxes....if you total up the tax abatements over time, do the new taxes generated after the abatement expires cover the cost of the abatement. The answer is yes if the taxes continue about four years after the abatement ends. And, that doesn't include the new taxes generated by the employment it offers our residents. In the case of the one approved last night, each job is worth at least $60,000 per year. Someone paid that can afford to buy a house and that house is taxed and those taxes are used to pay for city services."

1) Another and complimentary way of describing this: "This exchange — a near-term cash advantage for a long-term financial obligation — is one element of a Ponzi scheme."

2) There is no proof or serious argument to support the claim that $500,000 of annual payroll nets the City the equivalent from $500,000 in annual property taxes. This multiplier effect needs more scrutiny, argument, and support. Maybe it's true, but that case is not being made in public in a serious way. Mostly it's just assumed to be true.

Council seems disinclined to dig into the matter now, but maybe next year there will be more opportunity.

Anonymous said...

Bennett's logic is absurd! If property taxes don't cover the cost of public services than the taxes paid on the houses purchased by these workers won't pay for city services either and make the city's operating deficit even deeper. Though its unlikely that someone driving a forklift in a warehouse earns 60k a year, its assumed that they will live in Salem and pay Salem taxes, or that they don't already live in Salem and pay taxes directly on their home or indirectly though their rent.

Yes, we can hope that with new councilors that they may be willing to listen to reason and logic. Though I fear that because the city has followed this playbook on economic development for so long that they will continue to find a way to keep the status quo.

Susann Kaltwasser said...

The suggestion that with the new councilors things will change is a false hope. Even with Councilor Tom Anderson, there will only be 4 progressive voices on the Council. That is not enough to win a vote and Chuck Bennett will often be the deciding vote.

A concern I have is that too often city councilors do not either know enough, or demand enough of staff, or accept unproven assumptions when they make major decisions. One of these assumptions is that growth is good and brings jobs and revenue. But study after study shows that it does not pay for itself and as you point out puts a community further and further behind over time.

I had hoped that the new city manager, Steve Powers, would provide us better insights in how to make Salem better, but I am losing faith there too.

More people need to engage in these discussions here and on Facebook and wherever possible, so that we can get to the necessary kind of facts for making wise decisions going forward.

Thanks once again to the intelligent discussion on this blog.