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Measuring state's "bang for its buck" on JOBZ could be difficult, contentious
by Jeff Horwich, Minnesota Public Radio
December 24, 2003

This spot just east of Wyoming, Minn., will be one of Minnesota's first JOBZ developments. Polaris Industries will break ground this spring on a new testing facility for ATVs and motorcycles that is expected to open in 2005. (MPR Photo/Jeff Horwich)

Depending on whom you ask, Minnesota's new tax-free zones are either strong medicine for the state economy, or a slow-acting poison. In the coming years, it will fall to state officials and outside economists to measure which prediction comes closer to the truth. Even then, adversaries may never agree on just how much benefit we're getting from the zones -- and what they're costing us.

Wyoming, Minn. — Two miles east of main street Wyoming, a small town 30 miles north of St. Paul, the wind rattles through marshes and over the berms of a wastewater treatment plant. It looks like a great place to ride an all-terrain vehicle.

Apparently, it is.

Next year, Polaris Industries will build a 611-acre testing center here to put ATVs and motorcycles through their paces. Construction of the $25 million facility will be sales tax-free. After that, most income and property taxes won't apply until the year 2016.

	New sign coming soon

This is one of the first examples of a company taking advantage of the JOBZ program -- Job Opportunity Building Zones. Three-hundred-twenty-five communities in Greater Minnesota will have one or more parcels like this starting January 1. Few will snag such a giant operation. But the Polaris example raises some of the same questions that will dog many projects that arise in JOBZ zones.

The biggest question is, why is Polaris here? Did financial incentives from the state convince Polaris to choose this spot? Polaris spokeswoman Marlys Knutson says no. It had much more to do with a great mix of marshes, hills, and patches of forest.

"Actually, it's the terrain that was the most interesting to us," Knutson says. "We looked at a number of sites across the country. Quite frankly many of those states would have built the facility that we need at a no-charge basis. But given the fact that we're based out of the upper midwest part of the country, that was extremely attractive to us. So this particular facility was within 300 miles of all of our other plants and facilities. It also has terrain that was quite interesting from a testing perspective."

Even before JOBZ applications were filed, much less approved, there were signs Polaris had made its choice. The JOBZ application for this parcel already stated that Polaris intended to move in. Knutson says the company has still not calculated how much JOBZ might save them, because it was not a critical factor in the decision.

	DEED Commissioner Kramer

The Commissioner of Department of Employment and Economic Development, Matt Kramer, tells a much different story. After courting Polaris for months, he is convinced the promise of a tax free zone was fundamental to their choice.

"I can unequivocally tell you, as the state's top salesperson, that if you were asking to me to bet my commission -- my commission being the paycheck I receive every two weeks from the state of Minnesota -- on whether they were moving to Wisconsin or Minnesota absent JOBZ, I'd be a very poor person," Kramer says.

Kramer says if Wyoming weren't tax free, Polaris would be across the St. Croix River in Osceola, Wisconsin, where it already has another facility.

Resolving whether JOBZ truly closed the deal for Polaris may be impossible, says U of M economist Laura Kalambokidis. But the answer means the difference between economic development and corporate welfare.

"The risk is that you offer these tax benefits and they become a windfall gain, because you give the benefit to a company for activity that they were going to do anyway. And it's very hard to know whether that was that was the case. But the state is not getting any bang for its buck when it gives tax benefits as a bonus for activity that would have happened anyway," Kalambokidis says.

	U of M's Laura Kalambokidis

Nationwide, most economists are skeptical about how many jobs are actually "induced" by tax incentives.

University of Iowa professor Alan Peters is an expert on enterprise zones.

"It turns out that in the United States, if you take the current research, it looks like maybe one in ten jobs that are recipients of economic development incentives are essentially truly induced -- in other words, wouldn't exist but for those incentives," Peters says. "In fact, that's a fairly optimistic number."

Peters concedes a few points where Minnesota's program is different. JOBZ is more generous than most predecessors in other states. At 12 years, it also lasts longer. And, in theory, the program is designed to give a leg-up to depressed areas that really are not otherwise attracting interest. All of these factors could make jobs created under JOBZ more likely to be induced.

But Peters rejects the state's plan for calculating the costs and benefits of the zones, which will assume that 100 percent of the jobs are due to JOBZ. Peters believes even assuming an inducement rate of 30 percent would be giving the program the benefit of the doubt.

	Map of JOBZ zones

"The problem with that is if you assume 100 percent of your economic development spending really does induce new firms, then essentially it's always going to give you a very favorable outcome using such a model," Peters says.

DEED Commissioner Kramer says it's all in how you frame the question. While these economists think in terms of taxes that might have been paid, state officials also think in terms of jobs we know we've got. And we know we've got about 300 in Wyoming.

"The question I would ask -- for people when they say, 'Were we to have done nothing, would they still be in Minnesota' -- is: Would you prefer to consider the alternative -- (That we did) nothing and they moved to Wisconsin," Kramer says. "What would people have then said, looking at the state saying, 'You allowed a company to put those jobs over the border.' And as the company grows, as they expand, as they hire more people and those people buy homes, buy groceries, appliances, cars -- they're going to be doing it in another state."

Instead they'll do it here. And back in Wyoming, where Polaris will break ground in the spring, residents look forward to these spin-off effects. Shawn Gajeski is general manager at the Cornerstone Bar and Restaurant, probably the closest eatery to the Polaris site.

"All the owners are going to see an increase in business, especially us here at the Cornerstone, from construction workers to road workers to Polaris people," Gajeski says. "I think once they start actually building the place, the excitement level will go a little bit higher."

	Ready for action

Along with a boost for existing businesses, there are hopes Polaris will inspire new companies to move in -- under ordinary, tax-paying circumstances, of course. One almost certain addition is a new hotel for the 100-plus visitors Polaris expects every day. Nate Wilner, a loan officer with First State Bank of Wyoming, calls this, "the mall effect": Start with an anchor, and other businesses follow.

"It's a first step," Wilner says. "It's going to bring in additional businesses. We're trying to build up a business tax base, which will bring in more money to the city."

If these spill-over benefits are uncertain, so are the possible costs to the area. A road running through the property will be rerouted, inconveniencing some locals. Gajeski, the restaurant manager, says people also worry about increased property taxes and utility fees.

Because Polaris is moving onto the site of the water treatment plant, the city will have to switch to another sewer system. The site will also need an investment in utilities to accommodate the new company. Local officials say the sale of the Polaris land will cover many of these costs. But according to Gajeski, some locals grouse that Polaris got too good a deal on the land: $16,000 an acre, according to the JOBZ application.

Gajeski says residents also question the benefit of Polaris's high-wage jobs if no local people can qualify.

"It all depends how many jobs open up for regular people," he says. "Right now, from what we understand, it's going to be about 90 percent engineers and higher brass."

Company and state officials haven't said just who will fill the jobs in Wyoming. Some engineers will probably come from across the river in Osceola.

There one more concern in town. The local bank officer says there are some sour grapes among established local businesses when it comes to their new neighbor's tax-free status. It may be nothing more than pure envy. But they raise the same question that troubles those economists in far-away offices: Are we getting our money's worth?

Minnesota officials have at least 12 years to find out.

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