State and local economic development and

infrastructure policies

Primary sources of revenue

Federal: Income taxes State: Income or sales taxes

Proportion depends on state Five states have no corporate income tax

Good place to incorporate a business (South Dakota)

Seven states have no individual income tax Good place to retire (Florida)

Five states have no general sales tax Good place to buy things (Delaware)

State taxation and spending

Every state but Vermont has a balanced budget requirement; expenditures can’t exceed revenues in a given years

How to balance the budget? Cut spending Raise taxes Borrow money (through the sale of bonds) Many states have adopted initiatives/referenda

making it difficult or impossible to increase various types of taxes

Many jurisdictions require that voters must approve bond issues in referenda

Primary sources of revenue

Local government: Property taxes Property owners pay based on the assessed

value of homes, businesses, cars, other property

A landlord recoups part of the property tax in the form of higher rent

If property taxes are used as the primary revenue source for public education, wealthier areas will have more funding for schools and poorer areas will have less

South Carolina Act 388

Enacted 2006 Removed owner-occupied homes from residential

property taxes used for schools (which generated $0.5 Billion statewide)

Replaced with one-cent increase in state sales tax (exempted groceries)

Purpose was both to cut property taxes and to equalize funding for education

This has produced a shortfall in revenues every year (totaling $143 million by 2012)

Property taxes are more stable than sales taxes – in bad economic times, people are more likely to cut their consumption than to downsize their residence

Progressive, Regressive and Proportional Taxation

Progressive: Higher-income groups pay a higher percentage of their assets in taxes Income tax is generally progressiveRegressive: Lower-income groups pay a higher proportion Property tax is generally regressiveProportional/flat: Everyone pays the same rate Sales tax is proportional, although the more

you buy the more you pay overall

Other sources of revenue Lotteries

First state lottery was established in New Hampshire in 1964 Goal was to raise state revenue without imposing state

income or sales taxes Now in 43 states + DC (and multi-state games) South Carolina Education Lottery est. 2002

Proceeds go to K-12 education and college scholarships Unstable sources of revenue (novelty wears off)

Voluntary rather than compulsory, but has been described as “a tax on people who are bad at math”

Are poorer people more likely to waste their money on playing the lottery?

Frequently, lottery revenue replaces rather than adds to existing spending on programs

Other sources of revenue

Gasoline taxes Federal (generally 1/3 of revenue) + state Used for highways and transportation-related

infrastructure such as bridges Competition for funding between highways

and mass transit systems (in more densely populated areas)

Federal restrictions attached to funding Speed limits, drinking age, blood-alcohol

content, etc. “Sin taxes” – alcohol, tobacco

State and Local Expenditures

State: Social services, 36% Education, 18% Insurance trust (pensions) 16% Transportation, 8% Public safety, 5%

State and Local Expenditures

Local: Education, 38% Social services, 11% Utilities, 11% Environment and housing, 10% Public safety, 9% Transportation, 5%

How to Recruit Business

Tax incentives Financial incentives Direct grants Examples in South Carolina:

BMW plant built 1992, expanded 2003 Boeing plant 2009

Tax Incentives

Tax reductions Credits

SC Job Tax Credit program Enacted 1995, expanded 2007

$51 million in credits claimed in FY 2009 $1500-$1800 annual credit per job created, more

in economically depressed areas of the state SC Job Development Credit program

Enacted 1995, scaled back 2004 Must create at least ten new jobs with benefits Cash rebate to company based on personal state

income axes generated by newly-created jobs Average of $60-$70 million claimed per year

Interstate competition

http://www.heraldonline.com/2015/02/28/6843121/interstate-77-corridor-in-sc-flexes.html

“Right-to-Work Laws” Under federal law, states have the authority to

determine whether a business can be a “closed shop” Closed shop: You are required to join a union as a

condition of employment, if an employer has an exclusive contract with a union

SC and many other states (particularly in the South) prohibit closed shops

You can’t be required to join a union as a condition of employment in SC’

Makes union organizing much more difficult Employers would rather deal with non-union

workplaces – this gives RTW states a competitive advantage in attracting businesses

How are workers’ rights protected?

Tax Incentives Enterprise Zone: an economically

depressed area which is singled out for specific incentives to provide jobs and other economic development

SC Economic Impact Zone enacted 1995 Up to $5 million in tax credits per year for

creating jobs in depressed areas $24 million average credits claimed per year Program expanded in 2007 to cover the entire

state

Industry-specific incentives

SC has a program which provides for tax credits for up to 25% of the cost of rehabilitation a former textile property (such as the Bleachery in Rock Hill)

Other types of tax incentives

Land conservation/environmental Energy Conservation and Alternative Energy Community development Venture capital Tax deductions Tax abatements (specialized rates for specific

projects, e.g., lower or deferred property taxes for the BMW plant)

Capital investment Increased employment Research and development expenses

Financial incentives

Loans at below-market rates, financed by state bonds

State/local contributions to employees’ pension funds

Direct grants of land, infrastructure (water, sewer, roads), job training costs

SC spends $2 million per year on the readySC program through the technical college system, providing specialized training for employees of potential private businesses

Policy concerns

Some businesses are taxed differently/at different rates than others (equity issue)

External cost to other taxpayers – do their taxes go up to make up for revenues lost through tax deals?

Evidence is mixed as to how successful these policies are at producing enough economic growth to justify their cost

Competition among states to attract businesses and offer incentives may result in a “race to the bottom” – low taxes, low services (health, education)

Environment vs. economic development

Which is more important, creating jobs or protecting the environment?

Is job creation/economic development worth the damage to the environment (emissions, runoff, pollution)?

Regulations of things like air and water pollution are a disincentive to economic production (extra equipment/monitoring increases costs to business)

Brownfields: Abandoned industrial sites which pose environmental hazards, extremely expensive to clean up to make usable/habitable

Superfund: Federal program providing funding to clean up hazardous waste sites

“Environmental Racism”

Land which can be cheaply obtained for industrial/waste uses is generally in poorer areas where property values are lower Garbage dumps, landfills, sewage treatment plants, etc.

People who live in these areas tend to be disproportionately members of minority groups

Disproportionate impact of health and environmental hazards on these communities (air and water pollution, cancer-causing chemicals, noise, etc.)

These communities already have higher levels of health problems and less access to health care

What can be done about it?

Infrastructure

Roads, bridges, utilities (water, power, sewer) Highway construction and maintenance is largely

funded by gas taxes and/or tolls Federal gas tax is 18.4 cents/gallon for regular,

26.4 cents for diesel South Carolina’s state tax is 16.8 cents/gallon, for

both types of gas, third lowest in the nation North Carolina’s state tax is 37.8 cents/gallon,

eighth highest Incentive for people from NC to buy gas in SC,

good for SC businesses Low gas tax leads to low funding for infrastructure

Infrastructure

South Carolina’s Department of Transportation is governed by an eight-member commission, seven elected by legislators from each congressional district and one appointed by the Governor

The Governor appoints the Secretary of Transportation but the Secretary reports to the commission

In January 2014, the Secretary resigned after being arrested for…DUI.

Infrastructure

South Carolina has over 41,000 miles of state-maintained roads, the fourth-largest state road system in the country (after NC, TX, VA) Most states give more responsibility to local governments for

road maintenance SC is the only state which runs its school bus fleet as a state

rather than local function The SC school bus system is the fifth-biggest public

transportation system in the world (Molly Spearman) SC also has the oldest school buses in the country

A road with a black sign reading, for example, S-46-721 is a county-maintained road S= Secondary road (as opposed to primary S.C. Highway) 46 = Numerical code for the county (York is 46 of 46

alphabetically) 721 = Number of the road

Infrastructure

State Rep. Gary Simrill (R-Rock Hill) is Chair of a new House Transportation Infrastructure Committee

The committee has proposed transferring 15,000 miles of state roads to county jurisdiction

Decrease gas tax by six cents and increase sales tax on wholesale motor fuel by six cents

Infrastructure

Gov. Haley wants to increase the gas tax by ten cents a gallon (would raise $3 Billion for roads over ten years)

…but simultaneously cut the income tax from 7% to 5%, would total $8.5 Billion less general revenue over the same period

…and restructure the DOT Commission by removing legislative election (didn’t specify an alternative) (Jan. 2015 State of the State address) A bill in the General Assembly would give the Commission’s

powers to the Secretary of Transportation DOT study indicates that an additional $1.5 Billion

per year is needed to repair, maintain, and expand state roads