What Friends Are For
On October 20, Governor Tim Pawlenty and Jim Humphrey, president and CEO of the Minnesota-based Andersen Corporation, got together at the state Capitol for a big announcement. Thanks to what Humphrey referred to as a "good comprehensive package" of incentives, Andersen had decided to build a new factory in North Branch, a middle-class community of 8,000 people about 45 miles north of St. Paul.
Given the recently publicized and much-lamented erosion of manufacturing jobs in Minnesota, the timing of the announcement couldn't have been better. Andersen, which is the world's largest producer of windows and doors, will employ some 135 people at the new, $18 million plant. Not all of those jobs will be new, since 40 positions will come from a soon-to-be downsized White Bear Lake facility. Still, in these trying times, who couldn't celebrate the net addition of 95 good-paying factory jobs?
For the governor, though, this was more than a mere nugget of good economic news. It was a critical public relations boost for one of his highest profile initiatives, the Job Opportunity Building Zone program. Created by the legislature last spring, JOBZ represents the Minnesota debut of a popular economic development strategy that swept across the nation in the '80s and early '90s, the use of so-called empowerment zones. Although the details of such programs vary widely from state to state, all empowerment zones have one thing in common: They provide some form of "tax holiday" to companies that expand into designated areas.
For Andersen and any other company that qualifies, opening shop in a Minnesota JOB zone offers the sorts of enticements that leave shareholders drooling on their spreadsheets. Under the JOBZ program, Andersen won't have to pay a penny of property taxes on its proposed 150,000-square foot North Branch plant for the next 12 years. Nor will the company have to pay sales tax for the construction materials purchased to build the facility. (The city and state, on the other hand, have already committed to spending at least $770,000 on infrastructure improvements to accommodate the plant).
Andersen need not pony up taxes on any services that are related to the construction or operation of the plant. And if the company decides to buy some trucks or other motor vehicles, that's no problem. As long as the vehicles are garaged or used primarily within the zone, the company is relieved of the obligation of paying the usual taxes.
It doesn't end there. Under the JOBZ program, Andersen won't pay a dime in corporate income tax on the profits from its North Branch operation until the year 2016. Better yet--at least from the perspective of the company--any personal income that is attributable to the North Branch plant can be exempted from the state tax returns of the company's operators and shareholders.
Given such extravagant benefits, it is not hard to see why Pawlenty has more than once referred to JOBZ as "the mother of all economic development programs." But another, more elemental question raised by the deal is much more difficult to answer: What precisely is the total dollar value of the JOBZ program to Andersen?
"That's nothing that we would release. I think you would have to get that number from the state," says Andersen spokeswoman Maureen McDonough.
In fact, under Minnesota's much heralded Corporate Welfare Reform Act, the state is supposed to disclose the value of subsidies given to companies. The principle behind that landmark legislation is simple: The public has a right to know whether it is getting good value on its dollar when it shells out to help business.
But because the JOBZ program offers tax cuts in lieu of cash, it apparently does not fall under the purview of the act. Even if it did, under Minnesota law, Andersen's tax information is considered private data, which means that no one in government, outside the Department of Revenue, gets to review the company's returns.
Louis Jambois, the community development director for the Minnesota Department of Employment and Economic Development, says DEED has done "some rough estimates" on the value of a JOBZ designation for Andersen. But Jambois says he can't release those estimates. Besides, he adds, there is no way "to know on the front end" what the subsidy is worth.
According to the Minnesota Department of Revenue, the JOBZ program is expected to cost taxpayers about $9 million a year once it is fully established. But of course, that's just a rough estimate. The final number will depend on how many companies take advantage of the program. Under the law authorizing the JOB zones, as many as 50,000 acres of industrial and commercial property may be taken off local tax rolls statewide.
JOBZ boosters are betting this largesse will prove to be a good value for taxpayers once all the new jobs are taken into account. Critics point out that most academic research into the efficacy of empowerment zones provides little grounds for such optimism.
"There have been some studies that look into whether these zones create any jobs, and what they find is that they create very little," notes Art Rolnick, the director of research at the Federal Reserve Bank of Minneapolis. The academic consensus, Rolnick says, is that empowerment zones simply tend to shuffle jobs around. And as competition for business rises with the increased use of such development tools, local tax bases are slowly eroded.
Like many observers, Rolnick asserts that there are much better, if less glamorous, strategies for promoting long-term job growth, such as investments in vocational tech programs, early childhood development, job retraining programs, and the like.
Unfortunately, in the same session that state lawmakers passed the JOBZ legislation, those very sorts of programs were gutted, says Carrie Thomas, a policy analyst with St. Paul-based advocacy group the Jobs Now Coalition.
"This year, most of the reductions were in the jobs skill partnership program, where there was a 20 percent reduction in funding," says Thomas. But budget cutters also severely curtailed or entirely eliminated funding for a whole host of other labor-friendly programs, including the Health Care and Human Services Training Program, the Displaced Homemakers Program and a number of youth training programs.
In the past, notes Rolnick, Minnesota's investment in such fundamentals has produced positive results. "If we invest a lot in education, our taxes will be higher and some companies will not locate here because it doesn't mean that much to them to have a high-quality workforce," Rolnick says. "But we've shown in Minnesota for many years that we can be a high-tax state and have a very successful economy. Our economy is successful because we have one of the most educated workforces in the country."
In Bayport, where the Andersen Corporation is based, news of the North Branch expansion has been met with considerable skepticism. At first glance, this is surprising. After all, Andersen, which has a total workforce in Minnesota of about 5,000 people, has long enjoyed a reputation as both a good employer and a benign corporate presence. The company's involvement in charitable causes like Habit for Humanity has been well chronicled.
But people in Bayport remember all too well the last time the state made a deal with Andersen, a deal that remains a source of considerable bitterness in the town to this day. It started in 1994, when the company announced that it wished to expand its operations and build a new factory in Bayport. At the time, Andersen said the new plant would one day employ as many as 3,000 people. There was only one problem: The company didn't have suitable land.
As it turned out, that really wasn't much of an impediment. In a dead-of-night legislative deal, lawmakers authorized the sale of a 245-acre plot of state land known as the Bayport Wildlife Management Area to Andersen. The price: $1.3 million, or about $5,300 an acre. "They got an unbelievable deal. At the time, building lots in Bayport were going for $60,000 per lot. It was clearly fishy," recalls Bayport resident William McManus, one of a small group of area citizens who actively opposed the deal.
The planned expansion never materialized. Then, in 2001, Andersen announced that not only was it not building the factory, it was selling the land to the Contractor Property Developers Co. The $7.25 million sale price constituted a tidy little profit for Andersen.
Shortly thereafter, Contractor Property Developers Co. came forward with its proposal for the old wildlife management area. The company wanted to build an 800-home subdivision on the land, a development that would have doubled the population of Bayport virtually overnight.
A furor ensued. Some residents fretted that such a large development would radically alter the nature of Bayport, transforming it from small town into a smaller Woodbury. Others worried about the impact on the town's schools, roads, and water and sewer systems.
At the time, the City Council seemed poised to approve the project. But those officials soon found themselves swept from office by a slate of anti-development candidates, including the current mayor, Rick Schneider.
What will happen to the property remains unclear--and a source of continuing concern and friction. In a survey of Bayport conducted this fall, the prospect of the "Bayport West" development topped the list of issues facing the town, beating taxes by a four-to-one ratio.
For longtime residents like William McManus, the land deal--along with Andersen's successful fight a few years back to have its Bayport property taxes slashed by 75 percent--has radically altered their perceptions of the company. "Most of us grew up with a great admiration for the company and their largesse in the community, but I think that goodwill has been squandered," McManus observes. When he heard about the company's planned expansion in North Branch--and the considerable tax breaks it would likely enjoy there--he was not surprised.
"There is no reason in the world to give a handout to Andersen," McManus says.
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