David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: tax break breakdown. We know from the data that communities of color and with higher percentages of low-income residents have been disproportionately impacted by the COVID-19 pandemic. The Pew Charitable Trusts recently released a report on how state policymakers can better direct what the report refers to as place-based, or geographically targeted economic development efforts, to help people living in those communities. The report notes that governments have spent hundreds of billions of dollars over the past 40 years on those place-based economic development programs, but the efforts have mostly been ineffective. Here to discuss that report is Josh Goodman, who helps lead research on fiscal management and place-based economic development programs at Pew. Josh, welcome to the podcast.
Josh Goodman: My pleasure. It's great to be on with you.
David Stewart: First of all, could you tell listeners about these place-based economic development efforts? What are they and how are governments using them?
Josh Goodman: Certainly. So, in the United States, the federal government, state governments, and local governments all use place-based economic development programs. And many of these programs have existed for a long time. And many of them might be familiar to people who follow tax policy. So, programs like the low-income housing tax credit, like the recently created federal Opportunity Zones program are examples of place-based programs. They attempt to direct economic activity to discrete areas, and they do that by either limiting the areas where the programs can be used or by offering preferential treatment to those areas.
State governments also create their own place-based programs. Many state job creation tax credits or investment tax credits have place-based features where maybe you can get the program statewide. But if you're a business that locates in an area of the state deems as distressed, you get additional benefits. Maybe you have to create fewer jobs to access that program or maybe for each job you create, you get a larger tax credit.
And then they're also local programs like tax increment financing that also use this place-based strategy. And the idea behind these programs is, as you alluded to, that there is geographic inequality in the United States and that really matters for people's lives. And so, of course it's difficult to be poor anywhere in the United States, but there's additional burdens from being poor in a very poor place. People in those areas often have lower quality schools. They have fewer economic opportunities. They may face health and environmental hazards. And so these programs kind of come from that understanding that there needs to be some kind of extra boost to help the economies of these struggling neighborhoods, cities, counties, or metropolitan areas.
David Stewart: How are these struggling areas defined? How do these incentives get directed at specific places?
Josh Goodman: Well, in our research, that's been one of the big challenges. If you just think about the city where you live or the state where you live, it might seem pretty easy to figure out where the distressed areas are. You probably know in your city what are some neighborhoods that aren't doing as well. In your state, you could probably name a city or two that's a bit worse off. But when it comes down to actually targeting these programs, there have been several challenges.
And what we did in this research is we did a literature review where we read around 100 studies from governments themselves, from researchers, from academics, and looked at how these programs are targeted and what are some of the challenges that they've pointed out. And what we saw over and over again is that programs intended to benefit distressed areas have actually benefited wealthier areas instead. And even when the programs actually are benefiting the areas they were intended to help, often it's not clear that the people who reside in those areas are actually benefiting or benefiting to the extent they could.
So, what makes it hard to target these programs? For one, some of the programs use subjective criteria. And so if you're targeting a program to an area based on it having dilapidated buildings or a street layout that isn't ideal or something like that, those are terms that it's easy for them to be open to interpretation and an area that's actually doing relatively well can end up benefiting.
You also have this problem where there's a difference between the areas that are eligible for these programs and the areas where companies are actually taking advantage of them. And so, you'll see this where if you actually just look at what areas are eligible for this program, they'll look pretty distressed. But then companies will locate in the least distressed eligible areas. And so maybe if they're locating in the 10 percent least distressed areas that are eligible for the program. And so, the activity is going to this subset of the areas.
And then you also have challenges where the areas aren't updated over time. And so obviously, especially if you're dealing with small areas like neighborhoods, conditions can change over time. And unless governments are being really attentive to saying, "We need to make sure these areas are still distressed." They end up directing benefits to areas that are better off.
David Stewart: Now, do you think that there are better ways to help people in these communities than these targeted economic development incentives?
Josh Goodman: There's a long-standing debate over these programs and part of the debate is the balance between people-focused and place-focused strategies. And so if you want to think about like a people-focused strategy, something like the earned income tax credit is an example of that where if you're a low-income worker, regardless of where you live, you can qualify for the EITC. And then you have these place-focused strategies that are focused on obviously limited locations.
And we in our research don't say, "Oh, people-focused is better or place-focused is better." What we do say is if governments are going to devote billions of dollars to these programs, they need to make sure they're benefiting the intended places and that they're working as well as they possibly can or they need to consider other strategies. And these programs really are major commitments. If you think about the community development block grant, for example, it's the largest community development program that the federal government has.
I mean, it's a place-based program. Low-income housing tax credits are the largest source of federal funding of the construction or renovation of affordable rental housing in the United States. Opportunity Zones obviously has been sort of the biggest initiative along these lines perhaps in a generation. And so, at least in terms of the aspirations of these programs, they're really large and the money involves this really large. So, they really need to work as well as they possibly can.
Now, there are some alternative strategies out there. Most of the programs I've mentioned focused on financial incentives for businesses, for investors, for developers, but that's not the only approach. There are programs that focus on workforce training and making sure workers in these areas have needed skills. There are programs that focus more on the fundamentals of the area: infrastructure, broadband, things like that. Most of those programs haven't really had a distinct geographic focus. Most workforce development in the United States isn't targeted to specific areas in the same way these place-based programs are. But they're strategies that could be applied to specific places to address some of the concerns with these programs.
David Stewart: Now, how would you go about preventing these programs aimed at economically distressed communities from benefiting the wealthier areas rather than the local community?
Josh Goodman: There are a few steps that in our research we see working well. One of them is — first of all, to assess the targeting of these programs that you need to have a process in place where you're studying where the programs are available, where they're used, and how that matches up with distress. And so until you've done that, you can't have a really good idea of how to improve the targeting of these programs.
Additionally, targeting the programs using quantitative measures is important. And so something like the poverty rate, the unemployment rate — many of the programs are targeted using those measures, but not all of them and you have to be really careful about which ones you select. And then you also need to be regularly updating the areas that are eligible for these programs so that you don't have that where areas that have improved over time are continuing to see these benefits.
And we've started to see some governments thinking along these lines. One really nice example was in New Jersey where they have something called the municipal revitalization index (MRI). And it ranks every city, town, township, every municipality in New Jersey from most distressed to least distressed. And this is something New Jersey has used dating back to the 1970s to target many of its place-based programs. What staff in their department of community affairs found when they were reviewing the MRI, as it's known, the municipal revitalization index, is that there were some strange results. There were middle-class bedroom communities that were ranking as more distressed than some of the state's poorest cities. And so what they did was they really dug into this index. They looked at the different measures of distress they had and tried to figure out, "Well, why are we getting these strange results?"
And just to give examples of a couple of them, for one thing there was a measure about older buildings. What percentage of your housing stock is pre-1960? And what they found is, well that was supposed to look at places that had bigger infrastructure needs that hadn't had much investment. But in fact, there were communities in New Jersey that had high quality older housing stock. There was one that was built nearby a shipyard during World War II so all of the housing was from World War II. And so, that ranked that municipality as very distressed compared to others that were much poorer.
And so they went through the index. They did quantitative analysis. They actually looked around the country at other indexes like this one and came up with candidate variables. What could we be measuring to assess distress? And through that analysis, they updated that index and today they think and their research shows that it's a much better measure of distress. And so, it's that kind of analysis that we're hoping more local, state, and federal government will do to try to improve the targeting of these programs.
David Stewart: Now, one example that you mentioned in your report is tax increment financing in Chicago. And you found that mayors have used the program to redevelop the Navy Pier in parts of downtown Chicago, which are by no means low-income areas. They were able to do this because the state criteria for blighted property eligible for the tax increment financing was vague. So, how should Illinois and other states go about reforming these programs?
Josh Goodman: Well, I think one crucial point in your question is state policymakers really have a huge role in reforming TIF and other local programs, even though they are local programs. And that's one thing we found in our research is that states really have a central role in the targeting of place-based programs. The federal government, when they create place-based programs, they often delegate to states in whole or in part the targeting of these programs. So Opportunity Zones is just a great recent example of that where it's up to governors and their economic development agencies to determine what census tracks should be designated as Opportunity Zones, obviously within some federal guidance as to what they were allowed to do.
And then the other of the spectrum, states are writing the laws for programs like TIF. And TIF is really a classic example of where you see a lot of these more subjective measures coming into play, where there are terms like "blights." There are terms like "obsolescence" that come up in the laws. And that really gives a lot of leeway to local officials to put TIF districts where they see the greatest development opportunities, not necessarily in the areas that have the greatest need.
So, obviously local officials also have a role here in using these programs the way they were intended. But if state officials want TIF to be targeted to distressed areas, it's really on them to write the laws in a way that makes sure those are the areas that are benefiting from these programs.
David Stewart: Now another issue that you mentioned in your report is about these place-based programs encouraging investment in these distressed communities. But they're not necessarily creating jobs for the people living there. Is there something that can be done about that?
Josh Goodman: There are several strategies to ensure local residents benefit from these programs. First of all, I think it's important to be clear about the goals of these programs, that usually the recent policy makers care about a place is not because they have an emotional attachment to the buildings or the streets. It's because they care about the people who live there. And that being said, most of these programs attempt to benefit those people indirectly through incentives as I mentioned to businesses, developers, investors. And so it's not a given and governments need to be thinking about, "Well, how do we make sure local residents benefit?"
And we through our research see a few different strategies to do that. First of all, the industries that you target with these programs really matter. There's often a sense of, "Let's bring in the highest paying jobs and the most prestigious jobs. Let's get the best jobs possible." And clearly, that has a place in economic development, but it's not necessarily going to create jobs for local residents if you have a community that has many people without bachelor's degrees.
And so what we're starting to see some governments do, something Michigan has started thinking about, for example, is targeting industries based on the skills of their local workforce. What are the jobs that local residents will actually fill? And so, that can be a powerful approach. It's something I think that's been sort of a cultural change in economic development. And it's something that's an ongoing process to have more people think about that. But it's a promising idea that I'd love to see more states thinking about how to apply in their own jurisdiction.
There's also other strategies. One of them is something called first-source hiring. And this is often highly local, often at a city level. But the way it works is the local workforce development system is creating a pool of qualified candidates and select groups of employers, often in construction or employers that have contracts with the local government, those types of businesses. Their first stop when they're looking to fill a job will be to go to the local workforce development system. And there's this pool of candidates that have been trained. And so it's sort of matching employers with the local workers who've been the skills to fill the jobs.
And you can sort of see how those two strategies can kind of fit together. Where on one hand you're looking for employers that have the skills your workforce already has. On the other hand you're giving local workers more skills so that they meet the needs of employers. And so pairing those things together is the kind of creative approach that can make it likelier that local residents actually fill these jobs. And they end up benefiting the people they were intended to help.
David Stewart: Is there a danger with these place-based incentives of actually hurting the local community by reducing the amount of affordable housing stock?
Josh Goodman: That's a great question. And one core answer to it is states haven't been assessing for themselves. The answer is questions like that. We have seen incredible progress around the country where more states are studying the results of their economic development incentives over the last 10 years. So it's really been a movement to do that where policymakers, state lawmakers, governors have all recognized, "We spend a lot of money on economic development incentives, whether they're place-based programs or not. We need to know whether they're working."
What has been far less common is to look at the question we're discussing of what locations benefit from these programs? So, you can study an economic development incentive and not look a lot at what locations actually benefit. What's been even rarer than that is a careful assessment of who benefits. And that to me, based on our research, is really an important next step for states is if your question is: Do the local residents actually benefit from them? Or how does this interact with things like the cost of housing? Are they the ones filling these jobs or not? Are people moving in and out of these neighborhoods? And how does that affect how we interpret the results? All those are really important questions. And they're questions that I think states have really just started to scratch the surface to answer.
So what we're hoping is state governments that have really done a lot of work to get better data on economic development incentives in general, whether they're place-based programs or not, will start thinking more about these questions, about targeting to the intended places and the intended people.
David Stewart: Well on that question of data, I guess I'd like to ask about what additional data should these states be collecting? And this be something where it's made public so that everyone else can look at it? So what should be the goal for data collection among the states on these incentives?
Josh Goodman: One thing you see when you look at place-based programs is right now the data is really inconsistent from program to program. There are some programs with good data. There are some programs with almost nothing. And this has been one of the big, early questions with Opportunity Zones, where a number of different interested parties, stakeholders have said, "We really need more data on this program to assess its results." And so that's one part of data is we need good data on the programs themselves.
The other aspect of data is data on the areas you're trying to benefit. So you need to know whether the areas are distressed and you need to know whether that's where the activity has happened and what has actually happened under the program. And so usually there's data on the areas, but there's often questions about the reliability of that data, whether that data is timely. So those are things that governments also need to be thinking about.
What's crucial is that ultimately, governments are using this data to assess the programs. And that's where, as I mentioned, we've seen progress with more states having processes in place to evaluate their economic development incentives. Today around 30 states have processes to evaluate their incentives. Many of those states are using that data and analysis to reform programs that aren't working well. And in some cases, they're looking at place-based programs and asking really important questions about targeting.
So a great example of this was in Maryland. In Maryland, their Department of Legislative Services is tasked with evaluating tax credits on a regular schedule. And they've over the years evaluated a number of place-based programs, such as the state's Enterprise Zone program. And just in the last month or so they published new evaluations of many of their place-based programs.
And those evaluations raise some really important questions about targeting. Are Enterprise Zones and other programs like that targeted to the right locations? Are the residents benefiting? How well coordinated are these programs? Do they fit together well? Those are the kinds of questions that nonpartisan professional staff in Maryland have been asking and offering recommendations for policymakers.
And that's really what we hope to see more states doing where they have nonpartisan staff — auditors, economists within government, or in some cases outside of government — and they're asking these questions. They're gathering the data. They're doing the analysis. And what that ultimately leads to is policy reforms, where these programs are better targeted. They're better designed. And they're more effective at achieving their goals.
David Stewart: Well, Josh, this has been fascinating. It's been great talking to you. Thank you for being here.
Josh Goodman: My pleasure. Any time.
David Stewart: And now, coming attractions. Each week, we highlight new and interesting commentary in our magazines. Joining me now from his home is Executive Editor for Commentary Jasper Smith. Jasper, what will you have for us?
Jasper Smith: Thanks, Dave. In Tax Notes Federal, Scott Rabinowitz and David Schneider describe planning opportunities involving the unenforceable rights exception to the applicable financial statement income inclusion rule. Cameron Cosby and Libin Zhang analyze how the final regulations under section 1061 affect recipients of long-term incentive plan units in a REIT’s operating partnership. In Tax Notes State, the Search for Tax Justice, an ongoing series examining the inequities inherent in state and federal taxes, includes three articles that address tribal tax issues. Three Grant Thornton practitioners examine the underlying jurisdictional and nexus issues of the Louisiana Court of Appeals decision in Robinson v. Jeopardy Productions Inc. In Tax Notes International, a group of tax professionals suggest a more equitable, far less complex, and more practical variant on the proposal for a global anti-base-erosion tax. Yuval Navot examines the key Israeli tax aspects of stock-based compensation recharge payments made by an Israeli subsidiary to a non-Israeli parent. And on the Opinions page, Nana Ama Sarfo looks at some of the factors encouraging a golden visa boom in 2020 and ask whether the same conditions could continue in the new year. Joseph Thorndike considers the creation of the capital gains preference in the 1920s.
David Stewart: You can read all that and a lot more in the pages of Tax Notes Federal, State, and International. That's it for this week. You can follow me online @TaxStew, that's S-T-E-W. And be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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