The Shadow War: Regional Disequilibrium–The IDB Debate–Forerunner of things to come
BAWI was a time bomb–having rather huge impact decades after it was first introduced. The impact took a rather longish time to become apparent; but, somewhat contradictorily, BAWI through the fifties seem to exert a rather consistent , almost slow-motion, relatively unnoticed reaction which incrementally grew larger and larger until it exploded in the 1960’s–culminating in 1968. BAWI’s impact went way beyond its size, economic development and financial effects. BAWI seemed to best capture and express the felt, but unlabeled, chasms there were slowly becoming more obvious in the 1950-1976 period. If one wants a measure, an indicator to judge the anxiety which we alluded to in the first paragraphs of this chapter, it would be the public reaction to BAWI and the IDB.
For this reason, we will spend considerable time discussing this phenomenon–probably much to the reader’s consternation. There is a lot to be learned from BAWI-IDB during this period. In this reaction we see much evidence to support many of the themes and observations which will be drawn from our history of economic development. As to why we placed the discussion in the period 1945-1960(65) as opposed to a later chapter, we believe the story exposes the great shifts that were more or less silently becoming more and more obvious as the years went on. The story is fifties story and so we will not feel guilty about a section in this chapter which does not neatly conform to our demarcated time frame.
BAWI, despite its genuine and wide-spread negative reaction from the North and Midwest, was really of little financial, business attraction, or economic development consequence. Between 1937 and 1944 a total of twelve Mississippi IDBs were issued and closed. The de minimis size of these IDBs and the amazingly few examples of so-called “piracy” almost is shocking considering that if one were to ask a contemporary academic or even a practitioner to provide an example of a major historical economic development program or tool, it would probably be either BAWI or urban renewal. The citation of urban renewal is justified–BAWI’s impact, however, was not physical, nor developmental or financial–it was emotional.
BAWI rubbed raw the exposed nerves caused by the shifting tectonic plates of American economic development[1]. The perceived effects and consequences–and the programmatic memory of BAWI that survives today–is largely ideological in nature. At the time, however, BAWI was a lightning rod that attracted and captured the tensions of change in an era where “the times were a ‘changing”. BAWI is testimony to the reality of our two ships of economic development.
As discussed earlier, three southern states in the midst of the Depression-New Deal had set in motion an approach and a specific tool (the BAWI IDB) which did not fade away during the War and which, with the nourishment of spring provided by peacetime, grew and spread like a rose (or cholla[2] depending on one’s perspective) in the twenty years following. The Mississippi-IDB model evolved during the fifties and sixties, and spread, first with adoption by several of its neighbors. Then it mutated into multiple IDB varieties and spread literally across the nation. By 1970 the IDB in some form had been adopted by nearly forty states. In contemporary economic development the IDB is a taken-for-granted arrow in everybody’s economic development quiver. It was in 1950-1968 that the IDB’s took off; its catalyst was the imitation of. or coping with, IDB’s perceived successful use by some southern states (not all southern states, only some).
The particular Privatist variation expressed in the BAWI approach got a rather bad press at the time and, it seems, forever after. The negative publicity regarding BAWI was attached to all southern states and during the 1950-1970 period, BAWI was really a code word for Southern piracy and economic development abuse. In the fifties, however, there was more fire than smoke in this characterization. There was considerable truth that the South, with exceptions, was assuming a more aggressive posture in economic development attraction and recruitment. But there was, in fact, a lot more going on in the South during the 1950’s than was discerned by the Northern and Midwestern eye. The overall reaction of nonsouthern states to BAWI and their perception of enhanced southern economic development aggression led to what can be described as pre-war “arms race”. Like its World War I simile, the 1950-1970 economic development arms race significantly enabled the economic development war which erupted in 1976–and which continues, largely unabated (sorry for the pun), if more muted, to this very day.
The IDB proved to be the first privatist-originated tool which diffused throughout the United States in the post-World War II twentieth century. Our first task is to ensure the reader fully appreciates and comprehends the IDB and how it operates, the benefits it provides, and other programs which are commonly used to supplement it. We shall also take considerable pains to alert the reader to the distinction between the IDB and the still more widely employed “taxable”, private activity municipal bond which has existed since 1791. In chapter 3 we outlined how the BAWI-style IDB worked and explained that the real innovation in BAWI was the role of the state in authorizing, standardizing (and implicitly regulating), approving and promoting municipal issuance of bond that, because it was issued by a state or municipal “governmental” entity the use to which its proceeds were put were not subject to the federal income tax.
The attractiveness (and the underlying rationale) of the IDB to firms lies principally its federal income tax exemption, lower interest rate (compared to private bond financing) and the fact that it was frequently accompanied by some form of municipal and/or state tax abatement. In addition, the state legislation indicated to the firm that the municipality could issue such a financing provided predictability and a reasonable expectation by the company that the financing would be closed and funded. In practice, a key advantage of BAWI IDB to the municipality was that most municipalities that used the BAWI IDB were small, indeed very small, cities which had limited access to the bond markets–their access (and ability to find a buyer for the bond) was indirectly facilitated by state legislation.
The Mississippi model empowered municipalities, and later counties, but the state itself did not issue any financing. The other important aspect of the BAWI IDB was that it allowed full-faith and credit, i.e. government obligation bonds (to which the taxpayer was liable in case of company default) as well as revenue bond issuance (based on the revenues and assets of the project–not the taxpayer). In addition, general obligation bonds frequently require voter approval in a referendum (often with a super-majority, i.e. two-thirds voting) as did Mississippi in BAWI.
The potentially controversial aspects of the BAWI-IDB were (1) first and foremost, the unintended federal income tax exemption on behalf not only of a private firm but of one state, (2) the potential taxpayer liability, (3) the uneven playing field with municipalities who not wishing to issue IDBs would be eventually compelled to counter the IDB advantages, and (4) an initial fear of the 1950’s that dislocations and distortions to the financial markets might result from IDB bond issuance (they did not), and (5) that IDBs would be issued to companies which did not “need”, i.e. large profit-making firms the attractive terms associated with the IDB to reach a favorable location decision. In later periods of time when job creation became more prominent in economic development goal-performance, the potential failure of a firm to live up to its promises, also became a prime concern associated with the IDB.
An often unrecognized aspect of IDB financing was that it could not and did not exist previous to the establishment of the federal income tax, which, with the exception of the Civil War period, did not occur until passage of the sixteenth amendment to the U.S. Constitution in 1913. Having said this, those readers without financial background should also appreciate that the IDB has never been, to our knowledge, the sole or even principal form of sub-state level economic development-related bond financing. There has always been, since day one of the American Republic, bond financing by a municipality (or state) on behalf of, or to the benefit of, private firms. For many states, the state constitutional gift provisions put a pretty serious damper on the issuance municipal general obligation bonds issued to the benefit of a private firm, but had no impact on municipal revenue bonds based on the assets and receipts (and the creditability of the project sponsor–the private firm) issued by quasi-EDOs. These private activity municipal bonds do NOT enjoy any federal tax exemption and are not recourse (i.e. liable to the municipality in the event of company default). Taxable private activity bonds[3] have always been the preferred method to provide assistance to private firms and continue to be so to this day.
States and municipalities establish and empower a specific, usually quasi-public, EDO which assumes responsibility for the complexities of negotiation, approval, issuance, and servicing of both tax exempt and taxable bonds. Port authorities are an example of this type of EDO. Generally, any bond issued, while subject to state guidelines and regulations, is at the discretion and is the responsibility of the sub-state jurisdiction which issued the bond. As late as 1986, a Bond Buyer survey indicated that forty-one states had approved taxable issuance of private activity bonds.[4]
Our second task is to outline the diffusion of IDBs during the post World War II period. By ACIR’s reckoning in 1950 only three states had authorized some form of an IDB (and accompanying tax abatement): Mississippi (reauthorized 1943, initially 1936), Kentucky (1948) and Alabama (1949)[5]. In 1951, Illinois approved IDB legislation, followed by Tennessee (1951) and Louisiana (1953). Between 1955-57 New Mexico, Colorado, North Dakota, Vermont, Washington, Wisconsin joined the parade; 1958-1960 Arkansas, Georgia, Maryland and Missouri also authorized IDBs. The 1961-1965 period witnessed Kansas, Nebraska, Oklahoma and Minnesota (1961), Maine and Virginia (1962), Iowa, Michigan, Arizona, West Virginia, Wyoming (1963), Hawaii and South Dakota (1964), Montana and Rhode Island (1965) and Oregon in 1966. Three states had approved IDBs by 1950–thirty-two by 1966. This was indeed a diffusion bandwagon. But diffusion is only part of our story.
The initial users, the pioneers, of IDBs, were states in the East South Central Census division. What is not evident, however, is that the East South Central IDB “model” was for the most part NOT the model which most non-East South Central states adopted. The post 1950’s IDB diffusion is yet another example of our awkward saying that “a rose with the same name is not identical to another rose with the same name”. That is to say, an IDB adopted by one state is likely to be significantly different from an IDB adopted in another state. The variability associated with tool diffusion and the importance of states with their distinctive politics, processes and culture have serious effects on diffusion as indicated by our below summary of the 1950-1960’s IDB diffusion.
Political culture sneaks into economic development in very subtle ways–ways that are often submerged by research methodologies and the political ideologies associated with our two ships. In the following chapters, the reader will suffer through diatribes demonstrating that all urban renewal programs are not alike, nor are TIFs, or in later years Economic Development Zones or BIDs or even cluster approaches. Several variants or models of IDBs would be created over these two decades. For example, variations in IDB diffusion, seldom thought about, are “if” the program is adopted at all, who/why adopts it first, and the intensity of subsequent use of IDBs after adoption by a state or community.
Sixteen states had not adopted any form of IDB through 1965-66[6]. Most of these states were in the West–states associated with the Sunbelt including California, Florida and Texas. Of the Pacific coast states, only Alaska (with no actual bond issuance) and Washington adopted IDB and both embraced BAWI-style IDBs. While thirty-two states had adopted some form of “IDB” by 1965, the only states which had approved either/both municipal revenue/general obligation IDBs[7], AND ACTUALLY ISSUED at least ONE IDB, were: Mississippi, Tennessee, Alabama, Kentucky, Arkansas, Missouri, Oklahoma, Kansas, Nebraska, New Mexico, Washington and North Dakota. Twenty states did little more than authorize IDBs. Illinois, for instance, authorized IDBs in 1951 and twelve years later had not issued even one IDB. Wisconsin approved IDB legislation in 1957 and by 1963 had also issued no IDBs; Alaska, Vermont and Colorado (1955-1965) also had not issued any IDBs. Virginia, Maine and Minnesota did not issue IDBs for some time after their formal authorization. This, we suggest, is further evidence of the “arrow in the quiver” effect.
In the 1963 ACIR A-18 Report on the IDB the Report indicated that the total IDBs issued in the decade 1953-62 were LESS THAN one per cent of total municipal bond issuance[8]. This figure is not meant to sweep away any controversy associated with IDBs but to put them in context–IDBs were not flooding the municipal financial system. There are no reliable figures now, or for the period under discussion, regarding the issuance of private activity municipal level bonds. Their chief attraction to a private firm is a potentially lower interest rate and the reality such financing is frequently linked to local and state property and/or sales tax abatement.
The ACIR reported[9] that a cumulative IDB issuance through 1950-1962 totaled only $461 million dollars nationally. Twelve states issued at least one IDB in this period but heavy users were fewer: previous to 1965; $392+million (85% of the national totals) were issued by Tennessee, Mississippi, Alabama, Arkansas and Kentucky–the four East South Central states plus their neighbor, Arkansas. Non-southern states issued only $33.4 million (7%) and Washington issued half of that 7%. Washington, interestingly, had restricted its IDB issuance to its numerous port authorities.
In short, our initial observations concerning IDB inter-state variation is (1) some states did not adopt the IDB at all (why?) and (2) the intensity-volume of use by a state of the IDB after adoption varies considerably and that only five states used IDB extensively in the pre-1965 period. Many states seem to follow an “arrow in the quiver” rationale for adoption. The “arrow in our quiver” effect guarantees that some states will adopt an economic development tool for future potential use–and never in fact use the tool or program. Simple head counts and total dollar volumes do little to add to our understanding of program diffusion–at least in the IDB instance.
But as we suggested earlier, IDBs diffused themselves through several variants or models; we need to understand these models to understand what is being diffused. Using a framework developed by Robert J. Tilden[10] we summarize below the chief distinguishing factors (from our perspective) of five models of pre-1968 IDB.[11]
- The Mississippi-BAWI model: (1) financed by government obligation and revenue bonds, (2) authorized municipal level jurisdictions (later counties) only, (3) state established standards and approval procedures (including certifying municipal eligibility, requiring referendum and certifying legislative compliance for each loan to be made), (4) linked to tax abatements, facility construction and ownership, and includes federal income tax exemption. (Mississippi, 1936),
- The Kentucky Plan: (1) financed by revenue bonds only, (2) state and sub-state governments can issue IDB. (3) Allows for formation of an EDO specifically empowered and configured to issues bonds for a jurisdiction, (4) shares with BAWI linkage with tax abatement, facility construction and federal tax exemption. (Kentucky, 1948) Most commonly used (15 states including Vermont and Maine, 1962))
- The Pennsylvania Plan: (1) financed not by bonds but by state appropriation, (2) state control thru specialized state EDO (Pennsylvania Industrial Development Authority (PIDA)), (3) requires sub-state jurisdictions to form specialized EDO which secures private first mortgage for a facility which is supplemented by a thirty per cent loan/second mortgage from PIDA and twenty per cent sale of notes to private investors, (4) no federal income tax exemption–no bond issued, but usually linked to tax abatement and facility construction. (Pennsylvania, 1954)
- The Oklahoma Plan: (1) financed by general obligation and revenue bonds, (2) state authority with power to make second mortgage loans (like Pennsylvania) to local EDOs whose financing is based on issuing general obligation bonds, (4) linked to tax abatements, facility construction and ownership, and includes federal income tax exemption. (Oklahoma, 1959) New York, Maryland, and New Hampshire.
- The New England Plan: (a variant of the Pennsylvania Plan) (1) attaches state guarantee to loans/mortgages made by specialized municipal-level EDOs (2) to build, lease or sell industrial property to private parties, (3) state guarantee (90%) of such loans are by pledging the credit of the state, (4) pioneered by Maine this is later referred to as the Development Capital Corporation model (DCC) (Maine, 1965) Rhode Island, Vermont and Massachusetts)[12]
While many reader’s eyes are now glazing over, some understandable takeaways may be helpful. First, the Mississippi, Kentucky and Oklahoma plans did incorporate the IDB and federal income tax exemption and most states embraced these models. The Kentucky Plan’s, the most popular by far, chief innovation is that it did not use general obligation bonds (for which the tax payer was directly liable) but relied on revenue bonds instead. Secondly, as we proceed down the list and get to both the Pennsylvania and New England Plans one might wonder how these plans are considered as IDBs at all. Bonds were not issued and federal income tax exemption was not included in those plans. The thread which runs through each of the five plan-models is not bond issuance or federal tax exemption, but rather approving state legislation which empowered and financed loans and facilities to private corporations by state and municipal government. Some states consciously rejected IDB issuance and federal tax exemption and found other means to answer the BAWI challenge.
The origin and evolution of the Pennsylvania model provides us with a fascinating case study as to how a state model developed. With considerable irony involved in the telling, the Pennsylvania alternative to the Mississippi IDB model was based upon “the Scranton Plan” of 1945. The state would later adopt and modify a model adapted by the city of Scranton (and adjacent communities) in response, not to BAWI in particular, but to the collapse of the post-World War II Scranton economic base. BAWI was, of course, attempting to construct a manufacturing economic base.
At the end of World War II Scranton’s economy had imploded. Losing textile mills to the Mississippi IDB attraction problem was an issue, but the collapse of the anthracite coal industry was the real catastrophe which threatened to make Scranton and many cities and towns of Northeast Pennsylvania ghost towns. So under the leadership of the Chamber of Commerce[13] and the support of the city’s leaders, a network of EDOs (at least four to handle aspects of the Plan) was created in the post-1945 period. Raising funds from citizens and the private sector, the Scranton-area communities funded mortgages to acquire vacant properties which would be marketed by the EDOs to firms outside the area. At the end of the lease the firm would acquire the facility.
The Scranton Plan concept was firms would pay a low rent, hire workers, and create disposable income within the region. Some would say this is nothing but a BAWI “buy a payroll” endeavor, and they would be correct. The first firm was attracted to Scranton successfully and the public-private partnership set in motion a cookie-cutter community fundraising, with injection of municipal capital, to acquire new properties, build industrial parks and the like. After five years in operation (1950) fifteen firms had been brought into the city, a number of business parks planned and built and sixteen additional firms had been also relocated without Scranton Plan involvement.
The Pennsylvania Plan built on the Scranton Plan, approved in 1955-56, by injecting a state finance agency, the Pennsylvania Industrial Development Agency (PIDA), to participate in and provide access and financial participation in financings of local development corporations. These local EDOs were authorized and empowered by the state legislation throughout the state. Under the Pennsylvania model, the state industrial development authority would make loans to the local quasi EDOs for part (initially 30%) of the cost of constructing industrial plants and parks, for which the state IDC received a second mortgage. The rest of the funds were raised by the community and the firms involved. In this model, tax abatement was not automatic and there was no authorization for municipal IDB, either revenue or general obligation. PIDA received its funds through state appropriation. The model was certainly not as lucrative to the incoming firm as the Mississippi model, but Scranton was closer physically to existing industry and was not building from scratch in a relatively remote rural area. The role of PIDA, supplying 30, later 40% of the financing was critical[14]. By 1967, the Pennsylvania model had been in operation for ten years and over $104 million had been loaned by PIDA to the LDCs and nearly 84,000 workers, it was claimed, had been hired.[15]
Within two years of its birth the Pennsylvania model had been amended and tweaked by Oklahoma. Oklahoma, which had incorporated the BAWI general obligation and the revenue IDB option, also included a PIDA-like state authority whose purpose was to make second mortgages to local development corporations. Unlike PIDA, however, which received its funds directly from the state general fund, the Oklahoma Industrial Finance Authority issued general obligation bonds. With this tweaking, New York (Jobs Development Authority-1961), West Virginia, Maryland, New Hampshire and Alaska adopted the Oklahoma model by 1965. By 1966, these five states had made 295 loans (half by New York’s JDA).
We can see that as each state embraced the IDB revolution, it did so by fusing its own perspectives with those developed in other states. As reported, the recipients of these loans (except for Alaska) were already located in the state and hence the Oklahoma model can be viewed more as a business retention model than attraction.[16]
Another mix and match alternative IDB variant was finagled by Maine. Based on its view that the major barrier to a firm’s expansion in Maine was a lack of credit availability for the construction of fixed assets (plant facilities), and yet very reluctant to directly inject public funding as had Pennsylvania and Mississippi, Maine created a state industrial development quasi-EDO to operate a loan guarantee program financed solely by private funds. Similar to Pennsylvania and Mississippi, Maine established municipal development corporations which would negotiate and approve projects and submitted them to the state authority for loan guarantee approval. The Maine model quickly became adopted by Rhode Island, New Hampshire, Vermont, Connecticut and Delaware. Connecticut was the most prolific in issuing this model; by 1967 Connecticut had approved over sixty guarantees and Rhode Island twenty-seven.[17] This was the New England model of IDB.
That the pre-1968 IDB came in five flavors is important although the reader is advised that the distinctions between the models are important to us today, less in terms of programmatic and tool variations, than what they say about the state and its economic development policy process. So there will be no test requiring the reader to remember how the Mississippi-BAWI model differed from the New England model. What we hope is that the reader will carry away a greater appreciation that any economic development tool (such as the IDB) as operationalized by a given state can be quite different in structure, clients, goals and intensity of use than that devised by another state–and that the political culture of each state can be a powerful factor in explaining these variations.
Three major design characteristics differentiate the various models which followed the Mississippi-BAWI model: (1) whether government obligation and/or revenue bonds were allowed; (2) whether the state or the sub-state jurisdictions could issue such bonds; and (3) whether a bond issuance or a guarantee or loan from the proceeds of an IDB bond would be the principal public activity. As we shall discover in the next chapter, the state political culture as expressed in the state constitution and judicial decisions interpreting the relevant sections of the state constitution will be major factors in the variation among states. Our final topic relevant to the IDB is to associate these three design factors with specific geographic locations. If specific models share a common geography, we suggest, that it supports our notion that a distinctive political culture which diffuses across several states, has affected the design and operationalization of the IDB.
First eleven states allowed the use of general obligations bonds in their IDB program. Seven of these states were neighbors and “touched one another” (Mississippi, Kentucky, Alabama, Tennessee, Arkansas, Missouri, and Oklahoma). Four states (Washington, Alaska, Maryland and North Dakota) were scattered all over God’s creation; of these four only Washington was a moderate intensity user of IDBs (only $16 million over seven years). North Dakota issued about $2.5 million over the same period and Maryland only $100,000). Certainly, most of the heavy users of the most extreme form of IDB were geographically proximate and neighboring.
Secondly, most states that authorized the IDB models did so with their municipalities as their primary unit of service delivery. Of those states with active state-level dominance in their IDB program (typically those that followed the Oklahoma and Pennsylvania models) two states: Pennsylvania and New York were neighboring and they were the heavy users of these models. Of the seven states made loans/mortgages as an element in their IDB program, four bordered each other. Thirdly, Of those states that utilized a state guarantee instead of an IDB bond issuance to assist private firms, all but one (Delaware) were in New England. In essence, excepting the Kentucky model which was geographically dispersed, the other IDB models tended heavily toward geographic concentration.
Our theme in this chapter has been that there is much “going on” among the regions of the nation and the sectors of our economy during this time frame. Our sense is that economic developers and politicians saw these symptoms of change to which they could attach no consensual label for the disease. On top of all this unease, these were America’s golden years, certainly in terms of income growth, consumer discretionary income, low inflation and unemployment. This seems to be a period of classic policy cognitive dissonance and in that atmosphere policy-makers searched for someone, something to blame. The none-too-well-liked South with its clear and unmistakable aggressive economic development activities seemed a reasonable candidate for blame. The IDB, for reasons we shall discuss below, became the lightning rod and the focal point of a Northern and Midwestern push back.
As we observed earlier the IDB always operated on the fringes of our private financial system. The cumulative volume of IDB bond issuance was remarkably small and in the grand scheme of things, relatively few firms utilized this economic development tool. But Northern (especially) and Midwestern politicians couldn’t stop Southern state promotional activities, kick out Southern governors from visiting their industries, and they refused to engage in a “race to the bottom” by cutting the wages and benefits (and taxes) of their state employment base. They could, however, strike at the IDB. Why? The IDB rested upon the federal income tax exemption—which was disproportionately paid by Northern and Midwestern residents. It was patently unfair that Southern states and communities could reap the benefits of tax exemption paid by others. In short, the IDB was vulnerable to attack and push back.
And push back did follow. As the IDB diffused across the nation during the fifties and sixties, it generated an ever-increasing dialogue and comment by media, politicians and academics. Federal elected officials embraced the issue for all the usual reasons and eventually by the early sixties the matter was referred to the federal research institute, the Advisory Council of Intergovernmental Relations[18] for investigation and comment. In late 1962 the ACIR began research on the IDB which culminated in the 1963 Report (and 1965 amendment) from which we have drawn upon for much of our previous statistics and rankings. In this report, remarkably balanced and nuanced, the ACIR took a position against the IDB (to which Senator Muskie dissented), but acknowledged that at that time federal legislation to “reform” the IDB was not possible. It did acknowledge that the federal income tax exemption could be abused and needed to be regulated. Instead of impassable federal legislation, the ACIR suggested a number of reforms which states and localities could adopt. The report did serve to focus future reform efforts which culminated in substantial federal legislation in 1968 and even later in the Reagan years.
Before we discuss the 1968 federal legislation, we should take note of several observations salient to our topic which were made by the A-18 ACIR Report. The first is that the report mirrored our sense that much of the controversy associated with the IDB was a tempest in a teapot given the scope and volume of IDB issuance. The Report concurred that the rage and abuse associated with the IDB was overstated and media-driven—the numbers were just too small to account for any material change in the employment base of any city or state (winner or loser).
Secondly, the Report, correctly in our view, did associate high volume use of the IDB (which, by the way seemed to be poorly defined given the variations among the five models) with rural, small city, low wage states and region(s). The Report cited that there were logical reasons, chiefly the limited access to financial markets, for these communities to employ the IDB. For them, in many ways, it made sense given their highly disadvantaged situation—but conversely as a national policy the IDB needs reform especially given that national diffusion of the IDB, which appeared likely, might be more unsettling.
… in a community which has little or no industry, it helps to initiate take off into more economic growth.
We have here summarized the case for local public financing of industrial plants to explain the rationale of communities across the country, particularly in the South, which are trying to help themselves, i.e. to provide employment opportunities to their citizens. Their case should be stated because local initiative in the solution of public problems is in the best tradition of a democratic society…. The role of this relatively minor factor (the IDB) in the legion of variables involved in the national economy is not now identifiable. However, even if these programs have been effective in the short run for individual communities, their value from the viewpoint of national policy … is doubtful. The apparent success of communities in selected states in attracting industrial employment has not gone unnoticed in others. Comparable programs are being urged in all parts of the country….[19]
Thirdly, the ACIR investigated the issue of “runaway plants”, i.e. pilfering firms from somebody else’s community—often manipulated by “greedy” firm ownership which used its mobility to garner unneeded tax benefits. The ACIR Report’s findings rather than supporting any notion of a runaway firm, asserted that firms moving across regions were doing so for cost and market advantages and that tax incentives played a very minor role in any firm’s location decision.[20] While the Report does not call attention to
Local industrial development bonds are alleged to appeal to the runaway and the footloose industry. Evidence does not support this in any substantial way. Runaway industries, like airplane accidents, occur relatively infrequently but make good copy. We have not been able to identify more than twenty firms that have moved lock, stock and barrel from the North or East into the industrial bond financed (i.e. BAWI model states) buildings in the South.[21]
shifts in the national economy, it does provide support to our position that Markusen-style Stage 4 industry shifts crossing regional boundaries were occurring and that the South and its aggressive economic development efforts were getting a more or less undeserved blame for the shift. In effect, we are witnessing in this IDB debate the anxiety generated by the poorly understood early appearance of regional deindustrialization and the rise of the Sunbelt.
IDB legislation truly did sweep across the nation and became a component of many states economic development program in the pre-1970 period, but IDBs were obviously not the preferred tool or weapon that most non East South Central states chose to rely on. Indeed, more southern states did NOT use IDBs to any extent and accordingly, one should not associate the pre-1968 controversy with the South in general. We believe the fuss was largely generated by the BAWI model states[22] only and that other states responded defensively, compatible with our arrow in the quiver effect. This is as true of non-East Central South southern states as for the West, North and Midwest states.
By 1962 nine southern and twelve non-southern states had established industrial bonding programs. Six years later all of the southern states except North Carolina offered bonds as an enticement to industry and all but three non-southern states had turned to some form of development bonds as ‘defensive measures’.[23]
Instead, in the pre-1968 period most states almost certainly simply continued the time-honored non federal tax-exempt private activity municipal bonds, perceiving no compelling need to tap the federal tax exemption.
But as we are fond of repeating, all good things come to an end. By 1968 the North struck back in the form of Congressional legislation reforming IDBs. As more and more research shot up during the early and mid sixties[24], it became clear that the IDB was an incentive that, if properly structured (without property and sales tax abatement and lease rates for facilities that paid the principal and interest of the outstanding bond), the chief incentive benefit was that provided by the Federal government through firm-avoided income taxes. Over previous years many a grim confrontation had already occurred within Congress alleging abuse and demanding regulation-reform (John Kennedy as Senator was a protagonist in the fight). Unions also were heavily involved in demanding reform. So in 1968 Congress enacted the “Revenue and Expenditure Control Act of 1968”. “This legislation limited the tax exemption … to industrial development bond issues under $1 million”[25]. The legislation created two classes of IDBs: exempt and small issue. Small issue was the most critical for use by economic developers in attracting and retaining firms and they, for the most part, were limited to $ 1 million and lost much of their attractiveness to firms. Issuance of small issue IDBs plummeted after 1968 and did not significantly change until 1978 Congressional legislation which undid some of the exemption limitation.
[1] How’s that for a mixed metaphor. We kept it in the narrative because we like it and so deal with it.
[2] We especially like the very real “Jumping Cholla Cactus” which seems to be a real good fit with this discussion. It is our impression that cholla cactus are regarded by denizens of the West as nasty weeds that hurt and are impossible to get rid of. They can have attractive flowers when it rains.
[3] Private activity bonds do have to conform to certain IRS requirements, for instance Section 141 (a)(b) and (c)
[4] See Lori Raineri, “Industrial Development Bonds: A Public/Private Partnership”, Commentary, Fall, 1987, p. 8. Arizona, Georgia, Hawaii, Massachusetts, Nebraska, Ohio, South Carolina, and Wyoming had at that time not approved taxable issuance by jurisdictions or the state.
[5] A Commission Report, “Industrial Development Bond Financing”, Advisory Commission on Intergovernmental Relations (ACIR), June 1963, Report A-18, p. ii; and also Thomas F. Stinson, “Financing Industrial Development Through State and Local Governments”, Economic Research Service, Department of Agriculture, Report No. 128, December 1967, p. 6.
[6] The A-18 ACIR IDB Report asserted that in 1961 local IDB (Rocky Mount) was issued without any legislative authorization by the state legislature. See ACIR, A-18, op. cit. p. 54, footnote 5 and p. 57, footnote 9.
[7] An important distinction can be made between those states which authorized communities to us general obligation bonds as well as revenue bonds for IDBs. The original Mississippi model used general obligation exclusively, and by 1965 Mississippi, Alabama, Tennessee, Arkansas, Kentucky, Louisiana, Missouri, Oklahoma and in nonsouthern states, Michigan, Kansas, and North Dakota. Of the last three Kansas alone issued only one general obligation bond and Michigan and South Dakota none, Stinson, p.5. Nonsouthern states overwhelmingly authorized, and actually issued revenue bonds only–not following the Mississippi model.
[8] A Commission Report, “Industrial Development Bond Financing”, Advisory Commission on Intergovernmental Relations (ACIR), June 1963, Report A-18, p.
[9] In 1958, the Area wide Committee of the Committee for Economic Development (CED)[9] conducted a national survey (which we shall discuss at nauseating length in an appendix). While totally ignoring both the Mississippi and Pennsylvania models (because they are not accepted in ‘certain quarters’) CED asserted that seven states, Maine (1949), (New Hampshire (1951), Massachusetts, Connecticut, Rhode Island (1953), North Carolina and New York (1955) had authorized, set up and issued IDBs by 1958. Vermont (1953), Wisconsin, Kansas (1955), Michigan (1956), South Dakota, Minnesota (1957), and New Jersey (1958) had approved authorizing legislation only. The time line and geographic flow of these approvals, if nothing else, is fairly interesting and suggestive. By that time, these seven states (Massachusetts being the most active by far) had approved 407 loans ($33 million) and disbursed 292 loans ($20 million). The CED report also stated that SBA’s 1958 Small Business Investment Act which created “small business investment companies” (SBICs) could affect how these entities acquire funds and affect their subsequent evolution (p. 148, footnote 3). We have issues with their definitions of what an IBD was. The ACIR report, five years later, is much more reliable in its definitions and sensitivity to the forms of IDB. As we have discussed in an earlier chapter, Massachusetts, for example, did not approve IDBs in this period and the loans it made were not federally tax exempt to the recipient
[10] Robert J. Tilden, “Public Inducements for Industrial Location: A Lesson From Massachusetts” Maine Law Review, 9ff
[11] As identified by the 1963 ACIR (A-18) Report, op. cit.
[12] Maine adopted two IDB legislations both in 1965. The first followed the Kentucky model and the second pioneered the New England model.
[13] The Scranton Chamber of Commerce (including its Scranton Plan subsidiary, the Scranton Industrial Company) grew and diversified its programmatic activities over the next seventy plus years to become a major economic development organization and model. Today it is involved in virtually all aspects of economic development and are a leader in Pennsylvania economic development.
[14] Essentially the Pennsylvania model followed the outlines of a decentralized, municipally based, private-public attraction/industrial park development program. Does all this sound vaguely familiar? The chief distinction it would seem between BAWI and the Scranton Plan is that the latter drew its financing exclusively from the private sector and the former involved government and indirect federal subsidies. Both were firmly rooted in microeconomic cost reduction strategies and both involved heavy doses of promotion and attraction. Both constructed facilities and equipment for use by private corporations–assets which reverted to private ownership. Privatist BAWI was more than willing to use tax payer funds, and government entities to attract and facilitate private investment–that’s why it was frequently assailed by old-style southern conservatives as “socialism”. Northern economic developers appear much more finicky to mixing public money with private benefit. Why? In Chapter 7 our case study of Massachusetts will further explore this question.
[15] Stinson, 1967, p.9
[16] Stinson, 1967, p.11
[17] Stinson, 1967, p. 12-13
[18] The ACIR had been created by Congress in 1959 as a successor to the 1953 Kestenbaum Commission. ACIR was directed by a 26 member commission which included six Congressmen/Senators, four governors and wide range of sub-state and federal officials. The President and Congressional leadership made most of the appointments. See John Kincaid, “The U.S. Advisory Commission on Intergovernmental Relations: Unique Artifact of a Bygone Era”, Public Administration Review, Volume 71, Number 2 (March-April, 2011), pp. 181-189.
[19] A Commission Report: Industrial Development Bond Financing (A-18), ACIR, op. cit. p. 74.
[20] This is earlier asserted in an excellent 1949 analysis and survey: Glenn E. McLaughlin and Stefan Robock, Why Industry Moves South, NPA Committee of the South, Report No. 3 (Kingsport, Tennessee, Kingsport Press, 1949).
[21] A Commission Report: Industrial Development Bond Financing (A-18), ACIR, op. cit.. pp. 70-71.
[22] The original concept underlying the IDB-Attraction Strategy was that it was chamber of commerce driven (government was secondary) and the core Mississippi model was used primarily by small town-rural and medium-sized municipalities (not counties), issuing municipal general obligation bonds (in later years moving to revenue bonds). Decision-making and approvals were municipal and the state role was more organizational and supportive than controlling. The “story”, as we have painted it, underlying these IDBs was akin to that proclaimed by a developing nation, struggling to create an industrial base and escape the domineering clutches of an exploitive colonial master. The community was risking its own assets to “buy a payroll” for the families and residents of the community. In many ways this can be viewed as the perfect expression of a populist self-reliant, municipal-based economic development strategy, using only the tools available to an impoverished municipality. The only problem with this line of reasoning was that the non-southern states (and several southern states) saw it differently– as a pirating of their business using unfair, and fiscally unsound economic development tools.
[23] IBID, p36.
[24] The best was a late sixties article by Kenneth J. Crepas and Richard A. Stevenson, “Are Industrial Aid Bonds Fulfilling Their Intended Purposes”, Financial Analysts Journal, Vol. 24, No. 6 (Nov-Dec 1968) pp,105-109; and the previously cited report by the ACIR,
[25] Lori Raineri, Industrial Development Bonds: A Public/Private Partnership, Commentary, Fall 1987, p. 6. See also Lynn Kawecki, A Historical Perspective of Small Issue Bonds, issued by the IRS available at http://www.irs.gov/pub/irs-tege/part1b02.pdf
Ron W. Coan 