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Pawlenty touts tax-free zones to help rural Minnesota
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PPL Corporation hopes its new Energy Marketing Center will be a boost to downtown Allentown, Penn. The building is being built in a tax-free zone. (MPR Photo/Tom Scheck)
One of Gov. Tim Pawlenty's top priorities this legislative session is to bring more jobs and businesses to rural Minnesota. Pawlenty is proposing 10 tax free zones as a way to entice businesses to move into rural areas. If the governor's effort becomes law Minnesota won't be the first state to have tried tax free zones as a way to create jobs. Pennsylvania has had a similar program for about five years. Some people there say it's been a great help in bringing development to depressed areas. Others say there are different ways to create jobs that work better and give local communities more flexibility.

St. Paul, Minn. — Pawlenty says Minnesota's rural economy is struggling. He says many rural areas are getting hit with the double whammy of business and population loss. He says businesses are moving from rural Minnesota to states with lower taxes like South Dakota, North Dakota and Iowa. Pawlenty told a crowd in Bemidji last month that creating the tax-free zones will help attract businesses and jobs to rural Minnesota.

"We're not the cheapest screw turners anymore," Pawlenty said. "If we compete just on labor costs we're going to get creamed and we're going to lose. We have to compete on not the cheapest labor but who can bring the most skill and qualitative value to the process."

Pawlenty says any business that moves into a tax-free zone would be exempt from paying almost every state and local tax for 12 years. Matt Kramer, the commissioner of the Department of Trade and Economic Development, told the forum that some may consider the so-called "Job Opportunity Building Zones" - or JOBZ - as corporate welfare. He says he prefers to think of the proposal as an enticement to bring high paying jobs and people to struggling communities.

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Image PPL's Don Bernhard

"As much as we want to talk about taxes, this is about jobs," Kramer said. "It's about building jobs. It's about building, as the the governor noted, good strong jobs that you can buy a house and raise a family on."

JOBZ is modeled after similar programs in Michigan and Pennsylvania.

Supporters of Pennsylvania's so-called Keystone Opportunity Zones say the program is working. They point to recent development in the coal region. They also point to a sparkling new eight-story building in Allentown, a city in northeastern Pennsylvania.

That's where nearly 200 construction workers are putting the finishing touches on a $60 million building for the power company PPL Corporation.

The building, which will be the new home to PPL's Energy Marketing Center, is being built in a tax-free zone. PPL's community and economic development manager Don Bernhard wouldn't say how much money his company will save from the tax breaks. He says, however, the tax breaks are a sizable enough incentive to build here.

"I don't think you can find a better example of what the KOZ program was intended to produce," Bernhard said. "There hasn't been a significant private sector investment in downtown Allentown since the mid 80s. This is exactly what the program was intended to do. To encourage investment in places where investment hasn't been occurring without incentives."

This is an incentive to get a business in there. You don't pay taxes until 2011, but by then a business is established and will hopefully stay.
- Janet Smith

In the early 1970s, downtown Allentown was considered a bustling community. But over time, department stores and other companies either closed or moved out. The main thoroughfare is now lined by abandoned buildings, dollar stores and lower end clothing shops. Bernhard and others say they hope the new building and other KOZ properties in the neighborhood will turn the blighted community around. He says, though, that PPL won't be adding many new jobs as a result of the building.

"It's not a lot of new jobs to the company," Bernhard said. "It's mostly reordering people we have. Adding some new jobs. Some people will be transferred. Their will be some new jobs added to other parts of the company but we really don't have a count on the absolute number of new jobs." Critics say that's their biggest concern about tax-free zones. They say employers won't be adding new jobs when they take advantage of the tax cuts. They say they will only shift existing jobs from one area to another.

Officials touting Pennsylvania's plan say it has brought jobs to the state. State officials estimate the tax-free zones created 3,500 jobs since the program was enacted in 1998. Businesses taking advantage of the zones range from distribution centers to a bus refurbishing business.

Janet Smith, the vice president at the Lehigh Valley Economic Development Corporation, works on setting up tax free zones in communities in the Allentown area. Smith says the goal is to keep the businesses in the area after the tax breaks expire. They hope a business grow deep enough roots that it will stay when it has to start paying taxes.

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Image An industrial park was built on the old Bethlehem Steel site in Bethlehem, Penn.

"This an incentive to get a business in there," Smith said. "You don't pay taxes until 2011, but by then the business is established and will stay. It will pay then pay taxes and contribute."

Smith says there's no guarantee that a business will stay in the zone once their tax-free status expires. The program in Pennsylvania and a similar one in Michigan haven't been in place long enough to know if that will happen.

While officials in Allentown have been touting the Keystone Opportunity Zones as the key to invigorating their city, Allentown's neighbor to the east has gone a different route. Tony Hanna is the director of the Department of Community and Economic Development for the city of Bethlehem: "The KOZ is symptomatic of community hysteria. Once things start going wrong then you start flailing about saying what can I do what can I do?"

Hanna says Bethlehem Steel was the dominant employer in the city for most of the 20th century.

But the steel mill shut down in the mid-1990s leaving a five-mile brownfield site along the Lehigh River.

Hanna says many people considered the rundown property to be the perfect fit for a tax-free zone. He says, though, that the city didn't want to give up the tax revenue it could gain from redeveloping the site.

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Image Not a magic bullet

"From Bethlehem's perspective, we looked at those kinds of acts as almost acts of community desperation," Hanna said. "We didn't feel we were desperate. We really weren't desperate enough to essentially do what other communities in the commonwealth did and that was to create these KOZ zones to effectively try to lure new business and industry here."

Hanna says the city is offering smaller incentives to attract businesses to Bethlehem. He says it's working.

Several technology companies have moved into a new industrial park. A distribution center that handles hundreds of thousands of containers has also been built on the old steel mill site. There are also plans to build another industrial park along the river.

Art Rolnick, with the Federal Reserve Bank in Minneapolis, says he prefers Bethlehem's approach over the tax-free zones. Rolnick says states think they need to cut taxes to compete with other states. He says that's bad for the overall economy. Rolnick says research shows that businesses looking for tax incentives will typically move from one distressed area to another. He says tax-free zones are generally a bad idea because they're an effort to reverse market trends.

There are much better ways of investing public money in promoting economic development.
- Art Rolnick

"This is not the way we should be promoting economic development to try to lure jobs from other areas and that there are much better ways of investing public money in promoting economic development" Rolnick said.

Rolnick says Minnesota and other states would be better off if they invest more money in education and workforce development. He says businesses consider a skilled workforce and a state's quality of life more important than tax breaks.

Several lawmakers are also concerned about Gov. Pawlenty's proposal. Some call it corporate welfare. Others say the state should be more focused on infrastructure and education. Rep. Ann Lenczewski, DFL-Bloomington, says it's likely the bill will become law since it's one of Pawlenty's top priorities. If that happens, she says other communities will want their own tax-free zones in coming years.

"Every time a state gets involved in providing special treatment for something you do create others who rapidly figure out, boy, we should have this to," Lenczewski said. "Once it gets started it's going to be really hard to stop it."

Supporters say the JOB Zone initiative is only one tool to help improve the economy in rural Minnesota. They say local governments have the option of applying for the program if they think it works for them.

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