Keystone Opportunity Zones

Facing serious budget issues, Pennsylvania is now pulling back on one of its signature economic development programs.  The administration of Democratic Gov. Tom Wolf has sent rejection letters to Philadelphia, Coatesville and other municipalities that submitted applications to the Keystone Opportunity Zone program. The rationale is that the state simply can’t afford it.

The Keystone Opportunity Zone (KOZ) program, which provides deep tax breaks in hopes of revitalizing abandoned, blighted, or underused properties, has long been touted by state and local officials as a success story. They say it has helped create nearly 10,000 jobs and pumped $1.5 billion in private development capital into communities, often in distressed areas.

While the KOZ appears, on the surface, to be a needed asset is revitalizing communities, one of the principle reasons for the KOZ coming into being is the heavy burden of property taxation.

There are many negative aspects of the KOZ.  While they attract business to communities they do so by shifting that tax burden on the rest of the people.   We invest in those businesses through higher taxes, especially through higher property taxes.  For every successful KOZ there are dozens that tell a very different story.

Once the tax abatement program ends those businesses seek some other place to locate and all that investment from the local taxpayers is for naught.

Another problem with the KOZ is that it creates an unfair tax advantage to one business which negatively impacts the existing competing business that have already contributed to the state and community.

Bad tax policy like the runaway property taxes in this state becomes an excuse for government programs like this where we talk about things like the 10,000 jobs and $1.5 billion in private development capitol.  What we don’t talk about is the actual cost of these programs.

The Keystone Opportunity Zones is a part of Pennsylvania’s Department of Community and Economic Development .  It divides the state into 12 regions each with it’s own office.

Pennsylvania’s Department of Community and Economic Development (DCED) employs 365 people.   77 of those are paid hourly.  Hourly wages range from  $17.15 to $74.06 an hour.  63 of those 77 employees make $45/hour or more.

The total cost for the remaining salaried employees comes to just under $20  million each year ($19,993.321).  Granted not all of this is specifically related to KOZ  but it does demonstrate the economic cost to taxpayers in just maintaining these bureaucracies. The DCED is also home to the The State Tax Equalization Board (STEB).  STEB was established by the General Assembly in Act 447 PL 1046, 1947, to compensate for the lack of assessment uniformity statewide in distributing school subsidies.  As a result of Act 2 of 2013, STEB staff became a part of the Department of Community and Economic Development (DCED). STEB is often referred to as the Tax Equalization Division (TED) within DCED.

STEB is only necessary because their is a property tax.  It’s another cost to taxpayers that would be unnecessary if we eliminated the property tax and went to a more equity system of taxation.

The DCED is just one of the State’s 33 Agencies.  We also have 14 state offices and 27 Offices and Commissions.  Each of these operate under the Executive Branch (The Governor) where little oversight is available to the Legislative (General Assembly).  Pennsylvania has nearly 80,000 state government employees work for Pennsylvania in just about every field imaginable. From auditors to auto mechanics, cosmetologists to computer programmers, scientists to security officers. Each of them a member of public sectors unions and eligible for the state lucrative Pensions and healthcare benefits paid for by the working families of this state.

When we think of Keystone Opportunity Zones we generally think of Manufacturing jobs but that’s simply not the reality.  Manufacturing jobs make up less than 10% of the KOZ landscape.  Financial Services make up the largest percentage as the chart from the DCED below reveals.

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Keystone Opportunity Zones (KOZ) and Keystone Opportunity Expansion Zones (KOEZ) are geographic areas that can provide specific state and local tax benefits but those benefits as transferred to the remaining taxpayers.

In a KOZ, the business property owners pay the same reduced amount of taxes for a decade no matter how much they improve their property, or how much its value increases. They will only pay at the full rate after the KOZ expires.

Spokespeople for the Pa. Department of Community and Economic Development (DCED) said they do not currently keep electronic records on the number and location of KOZs.

In 2009, the state’s Legislative Budget and Finance Committee analyzed the program. Its report was scathing. It found that KOZ program records are “poorly organized and incomplete,” and that DCED doesn’t monitor the type of business activities or number of jobs companies generate. The committee also found that many companies weren’t creating jobs or luring new investment capital, and the program didn’t require them to.

The problem here is that we still don’t really know the effectiveness of the KOZ.  While supporters and the DCED are quick to point to the successes there is too little discussion of the failures which far outnumbers the successes.

In our opinion this betrays a trust in Pennsylvania Government as to how our tax dollars are being spent.

In 2014 Philadelphia City Controller Alan Butkovitz is sitting, the Keystone Opportunity Zone program in Philadelphia is a major disappointment.

Butkovitz released a report  saying that the program, which waives nearly all business and property taxes for 12 years, has presented an exceptional burden to taxpayers for a meager return. The KOZ program has cost the city and school district more than $380 million in abated business and property taxes since it began in 1998, according to the Controller’s report. In return, it’s netted $132 million in wage taxes from the 617 businesses that have benefited from the program. What’s worse, more than 70 percent of the wage-tax revenue came from businesses that were already paying taxes in the city before participating in the program.

It’s created just 3,700 new jobs since enacted. For each new job, the Controller said, the city has waived more than $100,000 in taxes. At an average salary of $50,000 per job, it would take more than 50 years of wage taxes for those new jobs to pay for themselves.

And after all that, more than half the land within Keystone Opportunity Zones is still vacant.

“These findings are consistent with the literature in urban economics, which holds that diffuse tax incentive programs such as the KOZ are an ineffective tool for enhancing economic growth,” the Butkovitz report concluded.

In some cases, developers have enjoyed tax relief without actually building anything.

In Brewerytown, developer John Westrum owns an empty block across from a townhome community he built a few years back known as Brewerytown Square. The owners of those townhomes now enjoy the standard ten-year tax abatement for new construction, but Westrum has also paid no property taxes on the adjacent vacant lot for the past ten years, since it was part of a Keystone Opportunity Zone.

On Columbus Boulevard, the property owned by Waterfront Renaissance Associates that was once slated to become the Philadelphia World Trade Center, has also enjoyed KOZ benefits, even though it’s been empty for decades. Development plans at the site were caught up in a morass of legislation and litigation that led to the demise of both the Old City Civic Association and the River’s Edge Civic Association. But year after year, the KOZ was renewed, because the program has no participation requirements.

DCED has changed the KOZ program since then. Now, a company that relocates to a KOZ must increase its full-time employment by 20 percent within the first full year of operation or invest 10 percent of the prior year’s gross revenues in the property. There’s no rule saying employees have to live in Pennsylvania. The Department also now monitors the number of jobs a company has created and retained.

Programs like the Keystone Opportunity Zones are among the most common economic development programs in the country. But Good Jobs First considers it an “old, unfocused, and outmoded” approach to economic development.  Good Jobs First, a national organization that studies development subsidy programs, gives the KOZ program a score of 0/100 for disclosure, and a 23/100 in terms of monitoring and enforcement.

In concept, the KOZ is a good program built on sound economic principle.  In application, or should we say through government control and interference, a good concept can turn into a bad idea.  That certainly seems to be the case with the KOZ program.

A KOZ is a government program that allows the government to pick the winners and losers.  Regardless of the spin, when there are losers it will be taxpayers because the system is built on funding from an archaic system of property taxation.  By the time the state realizes they can’t afford it the program, taxpayers have already lost.  When it comes to losing, when it drove up their property taxes that loss may have included the very home in which they have lived and raised their families.

By shifting away from the property tax and moving to a PIT/SUT based tax for school property taxes we could eliminate much of the need for the government bureaucracies while offering school property tax free  zones across the entire commonwealth driven by local government incentives to bring new business to their community that doesn’t rely on shifting that burden to the remaining property owners. This maintains the intention and concept of the KOZ without relying on government funding to do it.

It’s a radical concept that supporters of the Status Quo choose to reject even though it’s clear that the Status quo isn’t working and it’s time for something different.  It’s not very hard to figure out why the Public Sector opposes such an effort….it’s called job security.  Even though reducing the need for government state workers is beneficial for the state in saving millions of dollars in tax revenue, much if which  would go back into the economy and business community, it also means eliminating jobs within government and those dues are the public sectors bread and butter.

The passage of HB/SB 76 would allow local and state revenue to be targeted to more specific needs rather supporting a questionable program when it comes to reducing the tax burden on Pennsylvania working families.

The are distinct benefits of eliminating the school property taxes in order to attract new business to that state but KOZ are limited and completely controlled at the state level through the DCED.  While the KOZ is good in its concept, it’s application and government controls have failed to deliver on their promise to Pennsylvanians.   At the same time it caused for a expansion of the bureaucratic affairs at both the local and state levels.   It shifts the tax burden to others while punishing established competing businesses in the community.

HB/SB 76 is a step in the right direction of maintaining the concept of KOZ without the need for government Bureaucracies and interference as well as without shifting burdens to others.  In short, it undoes the tax shift that the KOZ creates while still maintaining the concept and purpose of the KOZ.

 

 

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