Usually, when we hear the term "economic development," we think of something
that improves the standard of living for our community.
Unfortunately, what economic development often implies to some politicians and pundits
is government-guided development whereby public officials pick economic winners and losers
by favoring one or more specifically targeted businesses with special favors: tax
abatements, subsidies, free land, and other benefits, as opposed to other businesses.
An opportunity cost is the price of the next best alternative foregone. When local agencies use tax money to attract employers and jobs to their community, they often do so with money that must first be taken from someone else.
How do they do it? With the law. There are several major state laws that enable
municipal governments to manipulate their regional economy. These laws allow local
governments to abate local taxes or create agencies that build infrastructure for
commercial purposes and take other steps to increase its regions economic
development, such as increasing area employment or refurbishing of old industrial sites.
Here is a list (by no means exhaustive) of local tools for encouraging "economic
The Economic Development Corporation Act (Public Act 338): This law allows local
governments to create an independent economic development corporation (EDC) for purposes
of economic development. EDCs can borrow money or issue bonds (or both) for use on various
and sundry projects. They can even use revenue generated from a project to retire debts
left over from other projects.
Downtown Development Authorities (DDA): State law allows local governments to
create Downtown Development Authorities to "construct, rehabilitate, equip, improve,
maintain, or operate any building within the downtown for public or private use."
They are only allowed, however, in areas that have suffered a significant decline in the
number of businesses.
More images …
The Midland Economic Development Council is part owner of Larkin Parking Ramp in
Downtown Midland. Other cities have private parking facilities.
Tax Increment Finance Authority Act (TIFA): When property values rise, this law
allows local officials to collect a portion of the increase in property taxes, over and
above the base year in which TIFA was established. This also applies to DDAs and Local
Development Financing Authorities (LDFA). This money can then be used in economic
development plans as local officials see fit. The authorizing statute for Tax Increment
Finance Authorities has expired, though there are still several in the state remaining in
Local Development Financing Authorities (LDFA): A Local Development Financing
Authority is designed for encouraging industrial growth only. The LDFAs are different from
the now-defunct TIFAs in that TIFAs were used for much more general purposes.
As of April 28, 1998, there was a grand total of 573 local economic development
authorities operating in Michigan. Of these, 351 were Downtown Development Authorities, 87
were Local Development Financing Authorities, and 135 were TIFAs.
One of the most common tools local development authorities use for economic development
is the "tax abatement." For example, taxes that otherwise would be involved in
starting up a business are reduced to encourage businesses to open or expand in areas
government officials would like to see developed.
According to the Citizens Research Council (CRC) of Michigan, at the end of 1993, 6,654
certificates were outstanding for abatement of taxes on new industrial facilities. These
certificates represent a tax advantage over their competitors for those businesses
Interestingly, CRC noted in a different report that the tax abatement is used most by
local governments with the highest taxes. In other words, tax abatements may be necessary
to avoid losing businesses to low-tax areas. Of course, other factors may play a role in
business development, too. Low-tax areas may also have great schools and low crime rates,
which no doubt play an important role in business and location decisions.
Does the tax abatement method meet with success? Not as much as if local officials
simply would keep taxes low in the first place. CRC found that greater economic growth
takes place in jurisdictions where taxes are low and which consequently grant fewer
abatements. CRC found that "50% of high tax jurisdictions experienced low growth,
whereas only 18% of the low tax jurisdictions and 19% of the medium jurisdictions
experienced low growth." This suggests that keeping the economic playing field level
and offering no special favors yields better results than government picking winners and
losers through the use of tax abatements.
Poletown is an area of Detroit that once was home to thousands of people on 450 acres,
sharing 16 churches, 144 businesses, and one hospital. In 1980, the city of Detroit
informed the community that General Motors needed its land for a new Cadillac plant. A war
ensued, pitting residents against city government, which was represented mainly by the
Detroit Economic Development Corporation. The deal the city put forwardfought by the
citizens of Poletownwas to provide $450 million in local, state, and federal
subsidies, abatements, and infrastructure improvements in exchange for the land. The
residents lost their fight and were forced to abandon their homes when Detroit invoked the
states eminent domain law.
Nobel Prize-winning economist Milton Friedman is famous for saying, "There is no
such thing as a free lunch." What he means is that everything has a cost, even if it
is an opportunity cost. An opportunity cost is the price of the next best alternative
foregone. When local agencies use tax money to attract employers and jobs to their
community, they often do so with money that must first be taken from someone else. The
money taken from others is money that otherwise would have been saved or invested and
spent according to the priorities of the wage earner. Private action on the part of
individuals is what drives the private economy and creates jobs. The net result of
government action to "create" jobs, consequently, is that an offsetting number
of jobs may be destroyed (or just shifted around) in the private sector.
Regardless of how intelligent or talented local development officers may be, they
simply do not have the ability to outguess millions of individual decision-makers in the
market. No person or government institution has all the knowledge necessary to understand
the impact government actions will have on the vast, interconnected network of interests
represented by the marketplace.
The great virtue of people free to act in the market is that each person has a small
amount of information to use for his or her own ends. Those ends succeed or fail with each
person, without endangering the economic well being of the entire community. But when
local development authorities attempt to supplant the knowledge of many economic actors by
deciding who should and should not be anointed with tax abatements, low-interest loans, or
other government handouts, they attempt the impossible and disrupt a delicate balance.
They presume to know something that is unknowable: what is best for each individual
Public-sector intervention simply displaces private-sector initiative. It sends private
businesses scrambling for the biggest tax abatement they can get, instead of looking for
ways to satisfy the desires of their communities and make more consumer-friendly products.
The citizens of Michigan need to understand what politicians really mean when they talk
about "economic development." They need to decide whether they really want local
officials choosing what ought to be developed, disrupting the local economic balance in
the process; or whether private initiative should assume its rightful position as the
cornerstone of economic development.