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.
• RD spending not and adequate measure of
  technical progress.
• It may not yield any growth.
• LDCs could increase productivity with out any
  RD, 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 (NGOs)
• 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 (EZs)

• 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 dollarsbut
  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 TIFs 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
  TIFs.
• 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 regions 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.
  Petes)

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.
• EGDs - 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 gt 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?