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 communities in the metropolitan area. Jobs will be created in the metropolitan area from these business tax reductions, but at the high cost of $3,800 per year per job. Is it worth providing tax subsidies or other financial subsidies to encourage job creation in a metropolitan area, given that such policies cost around $3,800 per year per job created? Such a policy may be sensible if pursued in the right local economic environment. In a high unemployment metropolitan area the typical unemployed person is likely to be so desperate for a job that the social benefits from their obtaining a job may exceed $3,800 per year. Spending $3,800 per job may also make sense if the jobs provide particularly high wages or large amounts of on -the job training, or are more likely to go to local residents. Although local policymakers cannot easily target subsidies on the firms most likely to be affected, it is more feasible to target subsidies on firms that pay higher wages and provide extensive training. In addition to the benefits for workers of higher wages, higher wage firms will have greater multiplier effects. Some economic development programs have adopted some targeting criteria based on job quality. For example, Pennsylvania requires that firms receiving financial subsidies from the state be certified to be "firms." Subsidies can also be designed to encourage training and hiring of local residents. For example, many state and local education and training institutions, such as the Durham Technical Institute mentioned above, provide subsidies to new or expanding firms for training local workers. Subsidies to attract new firms or encourage firm expansions are more cost - effective if more of the subsidy is upfront. The typical U.S. business has a short time horizon. For example, a recent survey of corporate executives indicated that they used a real interest rate of 12 percent —ter an ordinary nominal interest rate of 16 percent when inflation is 4 percent per year —to discount future cash flows. Such a high real interest rate means that local subsidies provided ten years in the future have little effect on corporate decisions. A more effective strategy provides subsidies up- front: larger, shorter term property tax abatements; immediate subsidies of training costs; providing low cost land or infrastructure to the new or expanded facility. This assumes that local residents and local governments should use real interest rates of less than 12 percent in making decisions. This assumption seems reasonable because local governments can usually borrow money at less than 12 percent over the inflation rate. Another advantage of front- loaded economic development subsidies is that they force local leaders to deal with the costs of subsidies during their terms in office. Twenty -year property tax abatements pass on costs to political successors, which encourages irresponsible decisions. A disadvantage of front - loaded subsidies is the risk that a company will take the subsidy, and then quickly leave. A "runaway plant" is less likely for higher wage firms that make extensive investments in both human and physical capital, so this risk can be reduced by targeting subsidies towards higher wage firms. In addition, local policymakers can include "clawback" provisions to recover some of the subsidy if the firm leaves too soon. One way to implement clawbacks is to provide the upfront subsidy as a forgivable loan, which over time is converted to a grant if job creation goals are met. Clawback provisions in economic development subsidies have been upheld by the courts, but only if such provisions are in writing and are explicit about the company's obligations. For example, the city of Duluth won a late 1980s court case against a company which had received an industrial revenue bond from the city. The IRB included a written agreement prohibiting the transfer of equipment purchased with the bonds. The company went ahead and transferred the equipment elsewhere. Duluth won an injunction prohibiting future transfers of equipment. On the other hand, the city of Yonkers lost an early 1980s suit to prevent a plant closing by the Otis Elevator company. The city had previously provided below- market priced land to facilitate the plant's expansion. The city lost the suit because its agreement with the company did not specify the length of time that Otis had to remain in Yonkers. Paris Economic Development Corporation Page 50