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ED Now Feature: Local Taxes for Econ Dev: Finding and Sustaining the Political Will
Eli Dile   on Monday, April 9, 2018 at 9:05:00 am

By Eli Dile

A dedicated funding stream for economic development is something many in the profession can only dream of. Yet many states authorize just such a tool by allowing local governments to adopt a local option sales tax (LOST).

Sometimes used for infrastructure or transportation, sometimes used directly for economic development or related quality-of-life projects, LOST can be a powerful tool for change in communities. But asking voters to levy additional taxes on themselves is never an easy sales pitch, and sustaining support once it passes can be just as difficult.

Financing a transformation

In 1991, Oklahoma City lost its bid for a 5,000-job United Airlines maintenance facility to Indianapolis. Even though Oklahoma City offered the better incentive package, its mayor was told that the city lacked one key ingredient: quality of life.

“The worst thing that could have happened to the city is if we had won that project,” said Roy Williams, president and CEO of the Greater Oklahoma City Chamber. The high-profile loss was the impetus for something better. With the Metropolitan Area Projects Plan, or MAPS, as it is better known, instead of throwing money at a private company, Oklahoma City would invest in itself.

MAPS was a penny-on-the-dollar, temporary sales tax used to finance nine large public amenities across the city. The tax generated $363 million for a downtown baseball stadium, performing arts spaces, a library, an expansion of the convention center, and revitalization of the Oklahoma River and its waterfront. MAPS is routinely held up as an example of the potency and potential of a local option tax – just a few pennies tacked onto each sale created a modern, livable downtown from scratch.

Oklahoma City's Bricktown Canal, one of nine MAPS projects

About 100 miles north of Oklahoma’s capital is Ponca City, which passed an economic development sales tax for very similar reasons. The city of 25,000 was once home to the headquarters of Conoco Oil, which in 1985 had 5,000 jobs in the city. After moving its headquarters to Houston, that number is down to just 650 today.

“The community began talking about what we need to do to develop a real economy, not a company-town economy,” said David Myers, executive director of the Ponca City Development Authority.

In 1994, Ponca City voters passed a five-year, half-cent sales tax specifically to fund economic development initiatives. From the outset, the city built flexibility into the revenue’s potential uses. Ponca City uses it to pay for everything from industrial parks, streets, and water mains to direct incentives for companies.

“It gives us the resources to compete in the marketplace,” Myers said. “As a micropolitan community 100 miles from the nearest city, we have to stand on our own. We can’t rely on anyone else’s economic engine.”

Getting to yes

It’s safe to say that Texas is not big on taxation. Yet more than 700 communities across the state have voluntarily added to their local sales tax to finance economic development corporations (EDCs). Texas was a progenitor of local option taxes thanks to legislation in 1989 that allowed local governments to stage an election to add half a penny to the current sales tax to fund economic development. “It has been the game changer of all game changers for economic development in our state,” according to Carlton Schwab, president and CEO of the Texas Economic Development Council. A few years later, the state split what that money could be used for into two categories – one that finances industrial development (a Type A corporation) and one for public and cultural amenities (Type B). Many Texas EDCs receive 100 percent of their funding from these taxes.

Tyler is an east-Texas city that was deep red decades before the state as a whole followed politically. The first attempt at a local option sales tax in 1991 failed, having no support from the mayor or city council and full-throated opposition from the local newspaper. Four years later, the issue was put to another vote after the genesis of the Type A and B distinctions, and the issue passed as a Type B corporation with a razor-thin margin. The mayor and city council had come around to the idea, and one of the ways they won over the public was pledging to lower other taxes in the process.

“The voters liked the idea that the city would get out of debt and their property taxes would go down,” said Tom Mullins, president and CEO of the Tyler Economic Development Corporation. “It made [the mayor] very popular. He later ran for state senate and won, and his campaign was all about how he got Tyler out of debt, lowered taxes, and started paying cash for infrastructure.”

The zero-debt, cash-for-infrastructure pledge is a popular selling point for LOST. That was the message in Oklahoma City, which promised there would be no groundbreakings until 100 percent of the funding for each project was in place. Still, MAPS’ passage was dependent on the mayor’s leadership for the plan, which won by a 54 percent margin. In Tyler, vote wrangling by the mayor and city council was the missing ingredient that helped the LOST pass the second time around.

“You can’t just say we’re going to attract 1,500 jobs over the next three years. Nobody buys that. You need a credible plan as to what it is you’re going to do, and you have to be brutally transparent."

Some organization may seek a clear mandate from voters, but that was not a priority for the Oklahoma City Chamber (thanks to sophisticated polling capabilities). On the eve of the election, the chamber predicted it had just enough votes to pass it, and rather than sinking more money just to win by a larger margin, they decided to let the eventual results speak for themselves.

 “You can’t find anyone now who said they voted against it,” Williams said.

Timing of the vote can make a big difference too. In 2017, Ponca City put renewal of its sales tax as a single issue in a special election, so it wasn’t swept up in competing issues during a general election.

LOST can make the job of economic developers both easier and harder, as they find themselves increasingly embroiled in politics rather than their core duties. To defend Tyler’s tax, Mullins has had to square off with an organized, anti-tax citizens group in multiple public forums.

“I shouldn’t have allowed myself to be put in that situation,” Mullins said. “I’m the guy that’s supposed to do economic development and put deals together, but when the question was put forward who wants to help pass this, everyone took a step backwards.”

Maintaining support

Most local option sales taxes are implemented for a limited time, often five years, which adds to their appeal at the ballot box. However, many cities elect to renew them. Ponca City has renewed its tax every five years since 1994, winning by 77 percent in last year’s election. Third-party evaluation is one of the ways the Ponca City Development Authority has maintained strong public support for the tax. In 2004, PCDA hired Oklahoma State University to study its impact, which showed a $20 return to the community for every dollar invested.

“It beats the heck out of simply saying, ‘We’re going to do great things,’” David Myers said. “When you can throw numbers at it, verified, third-party numbers, it takes the wind out of the opposing arguments.”

Another way Ponca City ensures buy-in is through a “report card” that summarizes the state of the local economy through the previous year. In partnership with the city-owned utility, the report card is included with ratepayers’ bills once a year. The document details economic development highlights and is candid about the lowlights as well.  

“We try to make it as informative as we possibly can to build credibility,” Myers said. “We’re very candid because that way people will believe you when you say the good things.”

Oversight and transparency are critical

When asking citizens to pay more taxes, it follows that they will want a say in how the money is spent. A common practice is for each city councilmember to appoint a private citizen to an oversight board that governs how the money is spent. That’s how Oklahoma City staffed its Citizens Oversight Committees (one for each of the nine MAPS projects), which met to give input on the development process from conception through ribbon-cutting. Meetings were always public and open to the press. Each oversight committee was guided by a steering committee that ultimately reported to the city council.

“There were about 100 citizens who sat on these committees and watched over everything they did, from the design process through the construction and implementation,” Roy Williams said. “It creates total transparency.”

Sage advice

Though every local political climate is different, there will always be groups that disapprove of any new taxes. Despite the transformative results delivered by LOST in Texas, TEDC’s Carlton Schwab doubts the state would approve the law if the vote were held today. “I’m almost certain it wouldn’t even get a hearing in the legislature,” Schwab said. Tom Mullins encourages economic developers to ignore the loud voices on the margins and instead focus on the moderate middle.

“Public economic development incentives are disliked on both ends of the political spectrum,” Mullins said. “But those two groups, at best, are 20 percent each. That means you have 60 percent of the population that supports certain kinds of incentives. They’re okay with incentives, but they want them to be targeted and monitored.”

“Take advantage of a crisis, or create one,” recommends Roy Williams. “Whether it’s an economic crisis, manmade, or financial, think about how you leverage that to do something transformative in your community.”

It also helps to have a plan in place and communicate as clearly as possible how the money will be spent.

“You can’t just say we’re going to attract 1,500 jobs over the next three years,” David Myers said. “Nobody buys that; everybody knows you’re just making it up. You need a credible plan as to what it is you’re going to do, and you have to be brutally transparent. People understand that things go wrong.”

“Our message is, ‘It’s your money,’” said Carlton Schwab. “’You control what to use it for, and determine your own destiny.’ And that fits the Texas tradition of local governance and deciding what’s best for your community.”

No matter how much lobbying is done and how many public meetings are held, for voters, it ultimately comes down to a matter of trust – not just in the organization spending the money, but also in the community’s vision of its future.

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