2007-095-RES-Accepting and approving the Paris Economic Development Corporation Budget for the Fiscal year October 1, 2007; to September 30, 2008

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Lamar County — Paris Economic Development Plan subsidies the Faneuil Hall development project in Boston for example —and such large subsidies are more open to question. Guiding Principle 10: Providing Financial Subsidies to Individual Firms is Likely to be Expensive Per Job Created, but May be Useful if Done in the Right Circumstances and if Carefully Designed to Maximize Benefits and Minimize Costs. Providing tax abatements or other financial subsidies to the location, expansion, or retention of individual firms is probably expensive per job created or retained. This high cost per job is suggested by studies of the effects of overall local business tax rates. In a recent review, Bartik shows that, on average, a ten percent reduction in state and local business taxes increases local employment and business activity in the long -run by around three percent. These tax effects are similar for different business location decisions. For example, studies of branch plant location decisions also find that ten percent lower state and business taxes increase the plants locating in a local economy by around three percent. These estimates assume that business tax reductions are financed by increased personal taxes, or decreased transfer payments to individuals. Some studies find that business tax reductions, if financed by reducing spending on local education or roads, may reduce a local economy's employment. These estimated tax effects imply that state and local governments would have to give up around $3,800 per year in business tax revenue to create or retain one additional job in a state or metropolitan area. Business tax reductions do affect some business location decisions, providing additional tax revenue. But these tax reductions also go to business activity which would have occurred in the local economy without the subsidy. The lost revenue from this unaffected business activity more than offsets the gain in tax revenue from new business activity. In addition, a full fiscal calculation would need to consider population growth and public service costs. One could argue that the high cost per job created of general state and local business tax reductions need not imply a high cost per job created of discretionary tax subsidies. A local policymaker with perfect knowledge of each company could avoid subsidizing companies that would have located in the local area anyway. But in the real world, tax subsidies can rarely be targeted systematically. Once tax subsidies are provided one firm, the political pressure is overwhelming to provide subsidies to all firms. Furthermore, policymakers lack sufficient knowledge to avoid subsidizing companies that would have located in the local area anyway. A more reasonable assumption is that targeting subsidies is so difficult that discretionary tax subsidies have about the same cost per job created as general business tax reductions. Tax differentials within a metropolitan area have larger effects. Some studies suggest that a ten percent reduction in business property taxes - e.g., from a two percent effective rate to a 1.8 percent effective rate —in one community in a metropolitan area, holding the property tax rates of other communities constant, may increase the business activity in that individual community by 20 percent. Tax differentials within metropolitan areas have larger effects than tax differentials across metropolitan areas because individual communities within a metropolitan area are closer substitutes for one another, from the perspective of a business choosing a location, than different metropolitan areas are for one another. These effects of tax differentials within a metropolitan area are so large that it might appear that an individual community could gain both revenue and jobs from lowering business property tax rates. Such a strategy is in the long -run ineffective. Most of the community's new jobs will come from other communities within the metropolitan area. As a result, local labor demand will not be much affected. Furthermore, other communities in the metropolitan area will respond to one community's lower business taxes by adopting their own tax reductions. If all communities within a metropolitan area offer the same business tax reductions, then no individual community gains a competitive advantage over other Paris Economic Development Corporation Page 49