Summary

The following write-up is an attempt to determine if it makes sense to collect $1.2 million in taxes from Rutherford households, to operate the Rutherford County Economic Development Commission (EDC).

For some background on the county's budget and revenues please read our county budget analysis article.

Background

The EDC states its mission as follows:

Mission Statement: It is the mission of the Rutherford County Economic
Development Commission to promote & market Rutherford County to the
world; creating, retaining, & reinvesting dollars to provide a better quality
of life for the residents.

Analysis

The Rutherford County Economic Development Budget for 2009/2019 allocates $1.2 Million in tax dollars collected from the Rutherford county residents.

As per the EDC mission statement, these $1.2 million is intended to promote Rutherford county, so that new dollars would be "created" in the county, or existing dollars would be "retained and reinvested" as the way to achieve a better quality of life.

Striving for a better quality of life for the residents of Rutherford county is a desirable goal. However, I think before we commit $1.2 million of our own money, collected from all 18,000 households in the county, we should understand what "created", "retained" and "reinvested" dollars mean.

$1.2 million per year equals to $67 being taken away from each Rutherford county household this year so that the EDC can exist. As this money is being taken in the form of taxes, it is taken forcefully, whether the taxpayer believes the EDC is a good operation to spend $67 on or not.

Creating Dollars

By "creating dollars" we are to understand that the EDC will somehow establish new flow of money into the county which would not have existed without the EDC being created and funded.

Naturally, this new flow of money would have to benefit the county's tax revenue at least $1.2 million per year, so that the EDC would be justified in its existence.

Having a new business open up in Rutherford County as a result of the $1.2 million spend on the EDC, while it only results in $200,000 in new property and sales taxes being collected, is a loss for the county overall.

What Can Pay Back The $1.2Mil

What would a new business have to bring in the county in order for it to generate $1.2 million per year in property and sales tax revenue?

Since the county's revenues from property taxes make up 60% of the total revenues, and sales taxes make up 20% of total revenues, a 3:1 ratio, lets expect that the new businesses brought in by the EDC would have to return 3/4 of the $1.2 million in new property taxes, and 1/4 in new sales tax revenues.

3/4 of $1.2 million = $900,000 in new property taxes per year
1/4 of $1.2 million = $300,000 in new sales taxes per year

In order for this new business to generate $900,000 in new property tax revenues, it would have to introduce new property value of $170 million ($170M * 0.53% property tax = $900K). Existing homes being purchased by new employees, or existing land purchased by the business do not enter into this equation because they exist on the property tax rolls with or without the new business.

The new business would have to introduce new buildings and/or equipment, and its employees build new houses with the total value of $170 million.

In order for this new business to generate $300,000 in new sales taxes per year, it would have to bring in and/or employ people who would spend $15 million per year in taxable purchases in Rutherford County.

Measuring The Profitability of The EDC

While this may be a high mark to reach, it is at least very easy to measure. We simply look at the past years that we have spend $1.2 million of our own money, and list the businesses which have been brought into the county as a direct result of the EDC's marketing and assistance to those businesses.

Then we take the businesses new taxable properties, and if they add up to at least $170 million, then the EDC has earned 3/4 of its pay. If in addition, the business has managed to introduce $15 million of new sales in the county which didn't exist before it's opening, then the EDC has earned 100% of its operating expense. No net profit, but at least there is no loss.

With this scenario the taxpayers in the county would feel no tax burden, because the $67 taken from each household would be returned by the new business, so the following year the EDC would be completely self funded.

However, if the above benchmarks are not met, then the EDC is simply a failed investment, which resulted in a loss of taxpayer money and only two reasonable next steps exist:

1. Reduce the operating cost of the EDC to match the new revenues it brings into the county.
2. Eliminate the EDC as the cost of operating it doesn't justify the return it introduced in tax revenues.

Taking $67 away from each household in the county, just to waste it away does in no way "provide a better quality of life for the residents".

It does however provide higher taxes, and higher taxes is exactly what new businesses run away from.

Retaining Dollars

This is a very difficult measure to get our hands around, because it can only be measured by the businesses that WOULD have left the county IF the EDC did not spend $1.2 million to keep them here.

Taking $67 from each household just to bribe existing businesses to stay in the county seems like an upside down redistribution of wealth system, which none of us were given the chance to approve of.

If that business can't provide products/services which people want to spend their $67 on, then the business should fail or come up with a new product, service or plan. Having the county confiscate money from non-customers is not a business plan. It is robbery.

Reinvesting Dollars

This item is the simplest one to understand and question, only because it presumes that the EDC can better decide what to do with money it confiscated from its rightful owners.

If the EDC sees itself as an investment operation, then it needs to exist as such, and offer investment opportunities to people who are willing to give their money to the EDC.

Instead, protected by the county's authority to confiscate money, the EDC takes money from people and claims to invest it for them and their benefit - all the while, not providing any ability for people to pull out their investments if they have no confidence in the EDC's ability to make money.

This is not reinvesting. This is simply near zero odds gambling, with the tax payer shouldering the high risk of those odds.

Examples

New Businesses Announced in December 2009

The county announced in late December 2009 that a business had been attracted to the county, allegedly due to the efforts of the EDC. The announcement can be seen by clicking here.

In this announcement we learn that the business committed to introduce $4 million of taxable property and/or equipment into the county. It also commits to create 40 jobs.

The total budget for the EDC in 2008/2009 was a little over $1 million dollars (Rutherford County 2008/2009 budget).

So, looking at the numbers:

• $1 Million - the amount of money confiscated from Rutherford County residents to fund the EDC.
  • $141 Million - the amount of new taxable property and/or equipment required in order for the county to collect $750,000 (3/4 of $1 Million) in new property taxes
  • $12.5 Million - the amount of new sale transactions that would have to be initiated by the business and it's employees in order for the county to collect $250,000 (1/4 of $1 Million) in new sales taxes.

• $42,200 - the projected amount the county will receive in property and sales taxes, per year, due to this business being introduced into the county.
  • $21,200 - the amount of property taxes the new business would pay to the county on the $4 million worth of property and equipment.
  • $20,000 - the amount in sales taxes the county would collect if all 40 employees spent their entire salaries in the county.
    • $1 Million - total salaries for all 40 jobs, projecting that the average salary will be $27,000 per year (US national average reported by US Census Bureau).

Taking $1 Million from us in taxes, to generate a return of $42,200 per year, is the equivalent of investing at a 4.2% return rate.

For the next 5 years the county will be refunding $20,000 of taxes, per year, back to this business. The return rate shrinks down to 2.1%.

If the EDC shut down today, it would take this business 24 years to pay back the $1 million the county spent to run the EDC for one year.

Another way to look at this, in order for the EDC to pay for itself, it should have brought in 24 business like the one we learn about this week.

They only brought in one, completing only 4% of what they should have done in the last year.

What would you do if the people working for you only did 4% of what they were paid to do?

Conclusion

In short, the EDC exists as the county's speculation arm, where decisions are made to bet on potential new businesses with taxpayer money.

While probabilities and return on investment are commonly used in numerous investment firms when it comes to betting with other people's money, none of those firms have the ability to confiscate that money from their customers, nor do they escape accountability and consequences when they fail to produce a profit.

The EDC is exactly this type of operation, where taxpayer money is taken without question, and is then spent in ways which, either stand no chance of producing return, or are so vague and impossible to measure, that no sane investor would ever put their own money into such an operation.

There may be another reason for the existence of the EDC, however that is a discussion for another time and place.

Related Reading

• Lost Decade Proof of Failed Economic Development Policy : "During the past decade North Carolina had a net gain of three hundred jobs, according to UNC Charlotte economist Jack Cannaughton"
• Political Careerism the Root of Growing "Economic Development" Empire : According to the Citizens Research Council of Michigan, at least 58 separate types of "economic development" entities or programs are currently operating in Michigan. (Michigan's unemployment rate in December 2009 was 14.9%)
• Several dentists approached the Spindale Town Council Monday night to voice opposition to what they call taxpayer funded competition. - "We don’t like our tax money taken to subsidize a business that will compete against local offices.”
• Tax-Funded Redevelopment Alive and Kicking in Greensboro - "Guilford County commissioners also had to sign off on the aquatic center funding, and they did so unanimously without debate or a public hearing at a Jan. 14 meeting."
• Charlotte EDC-equivalent body in middle of controversy - "in the field of economic development, it’s best for state and local governments to focus their energies on competitiveness – on delivering core public services at the lowest-possible cost "
• Global TransPark Authority, NC State Agency Established 1991 - owes the state of NC $38 Million; Spends $4.5M per year while making only $1.2M per year; Has received a total of $140 million in tax money in the course of it's operation. Has no plan as to how revenues will be increased, or the money paid back.
• The $300,000 study arrived in 2009 to a General Assembly short on attention span and patience for embarrassing news. Based on records from 150 companies receiving targeted tax credits and 465 companies that didn’t, the study concluded that there wasn’t much evidence of economic benefit.
• American Express probably hasn't put an end to corporate incentives in Guilford County, but it's made it harder for other companies to ask. - The financial services giant chose eastern Guilford County locations for a $600 million data center last week and never asked for millions of dollars in incentives that the Greensboro City Council and Guilford County Board of Commissioners were prepared to consider. Amex found other reasons to make its selection.]
• A billion bucks to create Xanadus for wealthy team owners? Then not following up on (an incredibly cheapskate) $40 million buyback (with an escape clause in it, because by 2017 the Bengals are really gonna want to move to Louisville if they don't get a brand-new stadium in which to suck)?