Value of tax breaks for outstate firms divides Pawlenty and analysts

01/29/2007

Skeptics question whether the JOBZ program really creates growth or just subsidizes expansions that would happen anyway.


By Pat Doyle,
Star Tribune
Last update: January 28, 2007


When Stan Shetka needed a new location for his countertop manufacturing business, he chose Le Center because a building there fit his needs.

Shetka says he made his decision before learning that the building qualified for a generous state tax break program.

"It had nothing to do with it," he said of the program.

Gov. Tim Pawlenty called in his budget proposal earlier this month for an expansion of the Job Opportunity Building Zones (JOBZ) program for outstate communities. As the program enters its fourth year, Pawlenty and his allies say it has created jobs, saved others that might have been lost and lured firms to Minnesota from other states.

But critics say the state agency that runs the program has no way of knowing whether it has increased the quantity or quality of jobs in struggling rural communities and may merely have given tax breaks to companies that would have employed a similar workforce without them.

The JOBZ program, launched in 2004, has given qualifying firms exemptions from sales, income and property taxes for up to 12 years. Of the nearly 300 firms getting the tax breaks, 13 moved to Minnesota from other places, according to the state. The bulk of the firms in the program expanded existing operations in Minnesota or relocated from a taxed zone to a tax-free one.

An analyst from the Department of Revenue said this month that the exemptions could cost state and local governments more than $100 million through 2015.

The state says businesses that entered the program since 2004 have committed to creating 4,236 jobs and retaining 9,131 in outstate Minnesota.

But some who have scrutinized the program wonder how many jobs have been created and how much credit the program deserves.

"There is really no way at this point to figure out if these jobs would have taken place in the absence of the program," said Laura Kalambokidis, a University of Minnesota economist who has been studying JOBZ.

Whipped cream for pudding?

Shetka manufactures countertops and other household products from recycled materials. He said he needed to move from New Prague by 2004 because the building he occupied was going to be torn down. He says he chose Le Center because he found a building there that fit his manufacturing needs and because the city was close to the metro area.

"We were an existing company and needed a house," he said. "That's why we moved."

He said he later applied for the JOBZ designation at the urging of the city of Le Center. Shetka said he's hired six people and retained another at Le Center, and would have done so without the breaks.

Le Center economic development director Don Hayden acknowledged in an interview that Shetka was preparing to move to the city before JOBZ became available. But Hayden also reported to the Department of Employment and Economic Development that Shetka could have expanded elsewhere but landed in Le Center as a result of JOBZ.

New Prague's economic development director takes a dimmer view of the program.

"The money we spend for JOBZ, I don't think it's doing anything significant for economic development," said Jim Morris, who believes businesses are more often motivated by rent, space and the available workforce. "I think JOBZ just ends up being the extra dollop or two of whipped cream on top of the pudding."

Another firm that got a JOBZ break is Minnesota Soybean Processors in Brewster.

Before it entered the program, Soybean Processors built a plant in Brewster with county tax-increment financing that paid for bonds to construct water and sewer facilities it needed.

In 2004 the state gave Soybean Processors the JOBZ tax breaks to build a second Brewster plant, to make biodiesel.

At a state Senate hearing two years ago, the CEO of Minnesota Soybean Processors, Rodney Christianson, was asked whether JOBZ breaks were necessary for the co-op board to approve plans to build the biodiesel plant.

"If we did not receive [it], would we have the biodiesel plant or not?" he replied. "That was not a decision we had in front of us."

This month Christianson said in an interview that the breaks gave the co-op board greater confidence to build the second plant, but added, "If it made the difference from support or not, [I] just can't say."
Not enough information

Only a minority of the firms that entered the JOBZ tax break program last year committed to paying compensation greater than the minimum required by the program, a Star Tribune review shows.

The state in 2005 began requiring firms to commit to paying workers at least 10 percent above the poverty level for a family of four in exchange for the tax breaks.

Kalambokidis, the economist studying the program, says wage levels are among the questions raised when considering the cost effectiveness of the tax breaks.

"If you are going to spend that kind of money for the jobs, they better be doggone good jobs," said Kalambokidis. "You don't want to do something like this and lose this kind of revenue for low-paying jobs."

Most of the firms that secured JOBZ deals in 2006 did so after pledging to pay $10.23 or $10.58 an hour -- the minimum wages required under the program at different times of that year.

"Good thing there's a threshold there, or wages would be lower," said Sen. Tom Bakk, DFL-Cook, chairman of the Taxes Committee and a critic of the JOBZ program who pushed for the requirement. Before the Legislature approved the program, some firms in 2004 won the tax breaks yet committed to pay as little as $7.50 an hour.

JOBZ officials say their tax break recipients often pay more than the minimum requirement, citing reports submitted by businesses, local economic development directors and others.

"We do believe that companies know what they need to offer to compete in the marketplace," said Kit Borgman, a spokeswoman for the Department of Employment and Economic Development, which oversees JOBZ.

Pawlenty last fall cited a report by the nonprofit Center for Rural Policy and Development on 131 firms that signed JOBZ agreements in 2004 to back up his argument that the program was a success. The report concluded that the businesses created 2,601 jobs, or 31 percent more than promised -- and paid an average wage of $14.86.

"The JOBZ program's ability to create more new full-time jobs and at higher wages than was originally promised ... is a testament to the tremendous success story," Pawlenty said.

But the center's report noted what it called "plausible" arguments that companies were originally "low-balling" their estimates of jobs and wages, and might have expanded their workforces with or without program benefits. It said the data available are inadequate to settle such questions.

Kalambokidis agrees and expresses skepticism toward the state's accounting.

"The information coming out of the state is confusing and contradictory," Kalambokidis said. "I don't know how anyone can make a statement about the impact of the program based on the information we have so far."

She said state surveys reporting that most businesses say they wouldn't have expanded without the tax exemptions are unreliable because the firms have self-serving reasons to defend the breaks.