by Laurie Cummings, Senior Consultant for Economic & Education Policy
|This Advisor previews some of the initial evidence on economic development in Michigan’s tax-free renaissance zones.|
In July 1996 Governor Engler signed a series of bills that made Michigan the first state in the nation to allow tax-free “renaissance zones.” The zones were created to entice economic development in depressed urban and rural areas by exempting residents and businesses within the zones from virtually all state and local taxes. (See Exhibit 1.)
The zones have been a source of controversy. Some people believe that simply providing tax incentives is insufficient to help severely depressed areas and that an investment of public dollars and programs is needed. Others contend that public investments in depressed areas have been ineffective and that market forces can best generate revitalization.1 Observers in Michigan and other states are eagerly awaiting news as to whether this unique new approach to economic development can deliver the results its architects envisioned.2
The Zone Designations
Michigan’s renaissance zone law allows the creation of nine nonmilitary zones—six urban and three rural—plus two zones that include a former military installation. To compete for a renaissance zone designation, localities were required to submit an application to the state showing that economic and social hardship existed within the proposed zone. Applicants also were required to submit an economic development plan for the region, with preference given to plans that were creative and innovative.
Applications were submitted to a review board made up of the heads (or their designees) of the Michigan Department of Management and Budget, Michigan Jobs Commission (MJC), and Department of Treasury. Exhibit 2 lists the 11 localities that were granted renaissance zones; whether the zone is urban, rural, or military; the number of square acres in the zone; and the number of years the designation will exist.
Although the localities receiving the zones celebrated their success, they will pay a price. The cities, townships, and counties in which zones are located will forego tax revenue that they otherwise would have collected from the now tax-exempt businesses and residents. Since the zones have existed for less than one year, it is too soon to estimate the amount of revenue that will be foregone. In theory, however, losses to local governments should be minimal since renaissance zones are depressed areas and generate marginal amounts of tax revenue. Also, the state reimburses localities for the tax revenues they would have received for local school districts.3 The legislature has appropriated $6.6 million for this purpose for FY 1997–98.) Only time will tell whether enough economic development will occur to offset the revenues forfeited due to the tax exemptions.
The Tax Exemptions
The tax exemptions offered to residents and businesses in the zones come with very few strings attached. As shown in Exhibit 1, however, zone residents and businesses must still pay special assessments, millage for voter-approved bond issues, and other sundry taxes. They also must meet the following requirements:
- Landlords within the zone must comply with state and local building codes, zoning ordinances, and housing-related regulations. This was done to ensure than “slumlords” do not benefit economically from the program.
- Businesses planning to relocate more than 25 full-time-equivalent jobs into a renaissance zone from outside the zone must notify the locality in which it is currently located. If the locality passes a resolution objecting to the relocation, the business may not receive tax breaks from the renaissance zone. This was done to minimize the loss of jobs in non-renaissance areas and avoid creating a policy that creates “winners and losers.”
- Residents of the zones may not receive more than $10 million in combined state and local tax exemptions over the life of the zone.
- Businesses and individuals may not receive tax exemptions if they are delinquent on the single business, income, or other tax.
Absent from the legislation is any requirement that businesses must create a minimum number of jobs to receive the tax exemptions.
Although renaissance zone tax exemptions are in effect for up to 15 years, they begin to taper off in the last three years of a zone’s existence. Two years prior to the final year of a zone’s existence, businesses and residents must pay 25 percent of the state and local taxes they would have owed if not for their tax-exempt status. In the second to the last year, they much pay 50 percent of these taxes, and in the last year, 75 percent. After the zone has expired, there will be no tax benefits to those located in the zones.
A Preview of the Results
Since the zones went into existence on January 1, 1997, efforts have been made to attract new business development and residents to them. To this end, the MJC has advertised the zones on national cable television, in the Wall Street Journal, and through trade and association magazines. In response to the ads, the MJC initially received over 1,500 calls from interested businesses, although the pace of the calls has slowed over the past months. A new round of MJC advertising will begin soon to fuel continued nationwide interest in the zones.
Although it is too early to draw any solid conclusions about the zones’ effectiveness, there are some indications of increased activity in the zones. In May 1997 the MJC released data showing that approximately 1,000 jobs, $66 million in private investment, and 17 new projects were expected in the zones. More recent data show that additional commitments of economic activity have been made.
Exhibit 3 lists the number of jobs and amount of private investment that companies have committed to bringing to the zones as of December 2, 1997.4 It should be noted that these jobs are expected (no data yet exist on actual new jobs) and that there are no guarantees they will actually materialize. The exhibit shows that approximately 3,895 jobs, $316.1 million in private investment, and 43 projects will be generated in the zones. This is a 300-percent increase in jobs between May and December, a 379-percent increase in investment, and a 153-percent increase in the number of projects. If job growth in the zones continues at the same rate it did between May and December, approximately 4,800 jobs will have been created in renaissance zones during their first year of existence—impressive job growth for such economically depressed areas.
One important issue that these data do not address is the geographic source of the jobs. Some observers have expressed concerns that, instead of creating new jobs in depressed areas or attracting jobs from out of state, the zones could cause jobs to simply move from one part of the state to another. Such transferring of jobs would not only defeat the goal of a net job gain in the state but would create “winners and losers” among those located within and outside the zones. While such a job shift is certainly a plausible scenario, the MJC reports that most of the new projects in the zones so far are a result of existing businesses expanding rather than job transfers. Of those companies that moved into the zones from other areas, some were from other parts of the state and some from other states.
Exhibit 4 lists the types of companies that have committed to locating or expanding in each zone and the number of jobs they expect to generate. As the exhibit shows, the zones have had varying degrees of job growth since they went into effect in January.
Nearly half of the 3,895 jobs expected to be created in renaissance zones so far are in a single zone—the Warren Tank Arsenal Zone, which has attracted a large auto supplier. (The Warren zone expects 400 new jobs initially, with the remainder created over the next two years.) Grand Rapids also anticipates considerable job growth in its zone—812 new jobs, or one-fifth of the total 3,895 jobs. Detroit, which anticipates 465 new jobs, has attracted 12 percent of the total.
Other areas have attracted far fewer jobs. As of December 2, four of the zones are expected to generate only one project. Each of these zones also anticipates 30 or fewer jobs. This lack of job growth may reflect some of the obstacles faced by depressed areas that make attracting new business development particularly difficult. For example, the Gogebic/Ontonagon/Houghton zone is located in an isolated area of the Upper Peninsula and may find it difficult to overcome its geographic isolation. Another, located at the Wurtsmith Air Force Base, needs funds to finance construction of buildings that would meet the needs of companies interested in locating in the area.5
There are many obstacles that local officials must overcome before renaissance zones can meet their full potential. Some zones, particularly those in “greenfield” or undeveloped rural areas, are struggling to provide the sewers, roads, and other infrastructure necessary to allow the construction of new homes and businesses. Urban-area zones also face obstacles, such as the challenge of compiling small city lots into parcels large enough to accommodate the needs of businesses. It will take time for recruiting efforts, infrastructure improvements, and other start-up measures to take effect and prove or disprove the theory that tax-free zones are effective at revitalizing depressed areas. Today, it is simply too early to draw any definitive conclusions.
We do know that the number of anticipated jobs in these zones has been steadily increasing and that, by December 2, 1997, approximately 43 companies had expressed a commitment to bring an estimated 3,895 jobs to the zones. Whether job growth will continue at its present pace is yet to be seen. Under one scenario, the high job growth rates experienced this year could continue or increase as renaissance zones “catch on.” The opposite scenario also could be true—the high growth rates may represent a temporary surge in the zones’ start-up year and may taper off in the future.
To be able to assess the zones’ effectiveness, the MJC currently is collecting baseline data on jobs, property values, and other economic indicators in the zones to which future data can be compared. The results of this comparison will help determine which of the above scenarios will hold true and may well influence future urban revitalization efforts in Michigan and throughout the nation.