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St. Paul, Minn. — Gov. Tim Pawlenty criss-crossed the state to announce the job zone designations. Pawlenty started his day in Worthington. The governor told an economic development group JOBZ program is part of his administration's efforts to build a healthy economy. He believes the program helps rural communities compete with the Twin Cities.
"We got a million new people coming into the metropolitan area in the next 20 or 30 years. The freeways are already jammed, land prices are going through the roof, our infrastructure is already overloaded," Pawlenty says. "And it would be a win-win for the metropolitan area and for greater Minnesota, if we can divert some of the economic development and population trends out of the metropolitan area, into greater Minnesota."
The program designates 10 regions, with sites in every county that totals nearly 29,000 acres. The land is designated as JOBZ zones. Businesses that start or expand in the zones won't pay corporate income tax or state property tax on any improvements for 12 years. The businesses still pay property taxes on the land, and their employees pay personal income taxes.
WINNING COMMUNITIES ARE EXCITED
Glenn Thuringer, manager of the Worthington Regional Economic Development Corp., says the program generates excitement about economic development in outstate Minnesota.
"The JOBZ zones, we feel, will certainly create a lot of conversation, give us another economic development tool. We realize that not every project is probably going to qualify for one, but just the hype of it will get us in the right place to visit with these people," says Thuringer.
Critics of the tax-free zones say state and local governments will lose money. They say the plan could pit existing businesses against companies that move to the tax-free zones. Longer term, some worry it could add to the economic battle with neighboring states, especially states like the Dakotas, where there is already a signicifant tax advantage for companies.
Albert Lea Mayor Jean Eaton disagrees. She says inclusion in a JOBZ zone will improve tax revenue.
"The areas that we're looking at putting in our tax-free zone area are not generating any taxes as it is. So I don't see it as a loss, I see it as an opportunity," says Eaton.
Eaton says the tax-free zones will help her community as it competes with towns in Iowa, South Dakota and Wisconsin for jobs.
Matt Kramer, commissioner of the Department of Employment and Economic Development, says the program will target areas of Minnesota that have lost manufacturing jobs. In northeast Minnesota, the JOBZ zone includes sites with existing infrastructure like buildings and municipal water and sewer lines. Businesses like the former USX Steel mill in Duluth may be attractive now because of incentives in the JOBZ program.
"We also did include a number of sites, and I know of several here in Duluth, that are heavily contaminated sites, where absent this program -- and absent some additional assistance from the state, through perhaps our contaminated site clean up program -- a developer typically wouldn't look at, because perhaps there's some challenges there," says Kramer.
Northwest Minnesota has three JOBZ zones. The 8,500 acres can be divided into sub-zones. The process lets smaller communities into the program.
Economic development officials in designated zones are hopeful the program will pay immediate benefits. Peter Doll, manager of Development Services for the city of Moorhead, says two manufacturers have expressed interest in coming to Moorhead. He says the tax-free incentives will be very attractive.
There were 10 applications for the zone designations. State economic development officials based their decisions on a formula considering a variety of factors. Poverty rate, job loss, business closings and housing prices were part of the formula. The worse off an area is, the higher it scored on the criteria.
BUT WILL THE PROGRAM WORK?
Alongside the excitement of state officials and communities about to gain a tax-free zone, there are plenty of concerns and unanswered questions.
Pawlenty acknowledged his critics as he announced the zone locations.
"These zones are not perfect, they are not ideal. But they are a big step forward in terms of attracting job growth to the state of Minnesota. And they will work. We know that from other states," Pawlenty said.
That depends on whom you ask.
"I would say the results have been mixed, but there is something of a consensus that these types of tax incentives are not the most efficient way to create economic development," says Laura Kalambokidis, a professor of applied economics at the University of Minnesota.
One complaint is that tax-free zones put state revenue on the line -- in Minnesota's case, for 12 years, far longer than many such deals that have been offered in other states.
Either you're going to spend a lot on them -- you're going to give up a lot of revenue to get them to work -- or you're not going to spend very much and they're not going to be very effective.
"Can we sustain the fundamental attraction of Minnesota if our businesses aren't paying taxes? Can we maintain our workforce, our education, our natural resources, our transportation infrastructure, if the businesses that are attracted aren't paying taxes?" Kalambokidis asks.
State officials estimate the program will cost just $9.3 million a year in foregone tax revenue, starting in 2006. University of Iowa economist Alan Peters says if the zones actually attract companies, the cost is likely to be far higher. And that's the paradox of zones like this.
"Either you're going to spend a lot on them -- you're going to give up a lot of revenues to get them to work -- or you're not going to spend very much and they're not going to be very effective," says Peters.
WHAT ABOUT THE OTHERS?
One political advantage of the program is that it creates lots of winners -- 325 communities in all parts of greater Minnesota will have tax-free land. DFL politicians countered Pawlenty's announcement by calling attention to the losers -- the many other towns, in some cases right next door, that will not have a JOBZ designation.
This question also haunts Paul Hetland, the city clerk for Freeport, in central Minnesota. He applied for, and got, a JOBZ subzone.
"We have some pretty big fish on the line for our industrial park, and this will help to entice them in. And to be honest, it is to our advantage because we can say, we do have it, and such-and-such a community doesn't," says Hetland. "But at the same time, I have some reservations about whether or not it's fair."
Hetland almost didn't apply. He had entered into a verbal pact with other central Minnesota officials to hold back and prevent just the scenario that now exists -- one town has a no-tax trump card and others don't. But he had a change of heart when he found out Melrose, just down the road, was going for it.
As a city clerk, he admits he was a rank novice at assembling the application, and says many other small towns missed out because they didn't have the staff or the savvy.
"At the next council meetings in many of these small towns, people are going to be saying, 'What's this all about, what is this JOBZ thing, why did this town get it?' When it starts to circulate in local papers, it's going to be like, 'Why did such-and-such town get it and we didn't?'" says Hetland.
It's not too late. State officials actually have 21,000 acres left to give, though they did not say when they might open up again for new applications.
Hetland has another long-term concern about JOBZ.
"What if the Dakotas grab this, or Iowa, or Wisconsin? What if they grab the exact same plan? Then our competitiveness -- then it's an even playing field again," says Hetland.
Economists say when that happens, the playing field isn't even -- it's actually sinking for everyone. The research director of the Minneapolis Federal Reserve Bank, Art Rolnick, has been the most public critic of the JOBZ program.
"Nobody wins in these subsidy wars. It's only the private companies that win. Jobs are created by the market, not government," says Rolnick.
State officials say to look at the numbers -- 400 new jobs already created by the tax-free zones; 14 more companies waiting in the wings, and dozens more who have been in touch with local development officials around the state.
Critics agree the numbers will tell the story. But as the years pass, they're not so sure of a happy ending.
Official designation of the tax free zones takes effect Jan. 1, 2004.