Key Reforms: Smart Growth Targeting

Reform #8: Target Subsidies in Ways that Promote Smart Growth

Subsidy and tax policies favor newer areas

Many of our public policies, including development subsidies and certain tax formulas, are a contributing factor to sprawl. Governments encourage sprawl when they allow subsidies to go anywhere (even when the result is a loss of farmland), and they pay companies to do what they would have done anyway (move outwards). To make matters worse, states fail to coordinate their economic development programs with land use planning (in particular public transit) and they allow subsidies that once were targeted for urban revitalization to be applied to projects in newer and more affluent areas.

When all that happens – when newer suburbs are pitted against inner cities and older, inner-ring suburbs – it’s a rigged fight. Newer suburbs have all kinds of advantages: more undeveloped and uncontaminated land, newer infrastructure, a more educated workforce, less dependency, and higher incomes. That’s why many states enacted subsidies in the 1970s and early 1980s that were written to favor older areas, to try to level the playing field. But over time, many states have loosened the rules so that almost any locality can give away “anti-poverty” or “anti-blight” subsidies.

Subsidies are fueling sprawl

Two types of subsidy programs in particular, enterprise zones (EZs) and tax increment financing (TIF) have strayed from their original anti-poverty missions. Both programs offer subsidies to companies that locate within a geographic area and were intended to help poor areas attract jobs and investment.

Unfortunately, many states have loosened or removed their criteria for blight, allowing suburban areas to use the programs to subsidize sprawling new development. Anoka, Minnesota, a suburb of the Twin Cities, used TIF to give free land to 29 small manufacturing companies with about 1,600 jobs between 1996 and 1998. Half of the companies relocated from Minneapolis or older, ailing suburbs on its edge; all the others came from other suburbs. Most of the companies were moving because they needed to expand, and only one of them even considered leaving the Twin Cities area.

By staying in the region, the companies got to retain their skilled workers and stay close to their suppliers and customers. But when you look at these 29 corporate relocations from a regional perspective, the maps tell a disturbing story. The companies moved jobs away from the region’s poorest neighborhoods and those with people of color, and away from areas with the most households receiving public assistance. The moves also took job opportunities away from low-income families who could not afford a car. More than 70 percent of the jobs had been accessible by public transit before relocating, but in Anoka they were not. The new job-takers likely came from rural areas further north. See Another Way Sprawl Happens: Economic Development Subsidies in a Twin Cities Suburb for more.

Tax policies discourage smart growth

Current tax policies exacerbate sprawl by causing localities to fight for businesses (“cash register chasing”) rather than focusing on policies that benefit their residents. Most states have tax rules that force local governments to compete rather than cooperate for their tax base. This means localities adopt land uses that maximize property and sales tax revenue and minimize public-service expenses. The policy term for this is “fiscalization of land use.” Land use gets driven by local governments trying to balance their budgets, not by human needs or what’s most efficient or what’s best for public health – or what’s good for jobs.

On property taxes, fiscalization of land use means localities have every reason to use subsidies to pirate companies from each other. Large business facilities have high values and therefore generate substantial taxes (unless, of course, they get abatements), while business parks don’t have any homes with those costly school-age children (K-12 education is local government’s biggest expense).

But the tax-sprawl story gets really, truly ugly when it comes to sales taxes and retailing. Many states allow localities to add a “local sales tax increment” (usually capped at between a half and one percent), on top of the state sales tax. This “point of sale” tax often goes only to the city where the sale occurs, not to a regional pot. This gives local governments a perverse incentive to zone a lot of land for retail, subsidize retail construction, and pirate lots of retail sales from other cities in the region. Of course, from a regional perspective, that makes no sense, given how much excess retail space and how many dead malls we already have. But from the narrow viewpoint of an individual suburb, the goal is to land lots of busy cash registers. The biggest prizes are the national chains such as Wal-Mart, Home Depot, and Target.

Retail is not economic development

America is awash in excess retail space, and despite the fact that retail is a truly lousy economic development investment, a lot of this retail space has been getting subsidized. A 2004 study by Good Jobs First found that Wal-Mart alone has benefited from more than $1 billion in bricks-and-mortar subsidies for its stores and warehouses (see Shopping for Subsidies: How Wal-Mart Uses Taxpayer Money to Finance Its Never-Ending Growth).

Retail rarely deserves to be subsidized because it packs such a lousy “bang for the buck” compared to manufacturing or almost any other activity. To measure the ripple effects of a new business, you look “upstream” to see how many supplier jobs the region would gain, and then you look “downstream” to see how many jobs would be created by the buying power of the people who work at the business. The upstream of a big-box store does not create many jobs for the local economy (think of all those goods made in China), and the downstream ripple effects are terrible because retail jobs are overwhelmingly part-time and poverty-wage, with no health insurance. That means most retail workers have very small disposable incomes: after paying for bare necessities, they have nothing left with which to stimulate the local economy.

Retail is not economic development; it’s what happens when people have disposable income. We do not have more money in our pockets because we have more places to shop. Building new retail space doesn’t grow the economy, it just moves sales and lousy jobs around. When we subsidize retail, it costs taxpayers three ways: the bricks and mortar subsidies going to the new big boxes; the losses caused by main street and mall abandonment; and the massive hidden costs of public assistance to low-wage workers.

The advantages of smart growth policies

Smart growth means better living and good jobs. Supporting better public transit creates cleaner air and more economic opportunity for carless workers. It also creates family-wage bus and rail jobs. Cleaning up brownfields and rehabilitating older buildings helps us make more efficient use of our infrastructure, as well as creating good construction jobs. Grocery store workers’ wages and benefits are protected when we say no to Wal-Mart supercenters, and so are our Main Street merchants and the community life they foster. When we save hospitals and hospital departments in older areas, we save vital services for the neighborhoods and we help our nurses and doctors and aides. Preserving the tax base of older areas stabilizes home equity and creates fairer tax systems. It also creates a better quality of life by keeping public school class sizes reasonable, teachers’ wages competitive, and schools well-maintained. If we adopt land use policies that bring jobs and tax base back to older areas, there will be less need for subsidies to revitalize them.

Solutions and best practice

States and cities can enact a number of reforms to prevent sprawl and encourage smart growth. Several changes to development subsidies and local tax structures are outlined here.

Tie subsidies to public transit accessibility

One way to combat sprawl and keep subsidized developments closer to the urban core is to limit subsidy eligibility to companies that locate within a quarter of a mile of public transit. Sometimes called “location-efficient incentives,” such subsidies ensure that businesses create job opportunities for low-income families who cannot afford cars, give more commuters the option of using public transit, reduce traffic, and improve air quality.

Unfortunately, no states presently require transit access as a condition of economic development aid. Good Jobs First’s study Missing the Bus found that not one state coordinates its economic development spending with public transportation. However, several state legislatures, including Illinois and Connecticut, are considering bills tying new developments to transit access.

Some subsidy programs give preference or additional subsidies to developments featuring transit access or other smart growth factors. For example, New Jersey’s Business Employment Incentive Program (BEIP) offers additional tax breaks to companies that utilize smart growth principles, including locating near mass transit.

No subsidies for paving cornfields

In addition to strengthening and sticking to the intent language of programs like enterprise zones and TIF, states should pass legislation prohibiting any subsidy money from subsidizing sprawl. Maryland’s Smart Growth Priority Funding Areas Act of 1997 is a model here. The law limits incentive eligibility to projects built in areas that already have infrastructure or are already slated to get it. Companies choosing to build outside such areas must pay for needed infrastructure (roads, water, and sewer and utility hook-ups) out of their own pockets. Making developers bear the full infrastructure costs of development on the fringe helps tip the scales in favor of in-fill construction and urban reinvestment.

Regional sharing of local sales tax revenue and some property tax revenue

In many regions, the way in which tax districts are drawn serves to fuel sprawl and heighten regional disparities. Sales tax revenue comes from retail sales in a tax district. The more stores that locate within a district, and the more they sell, the more the jurisdiction will collect in taxes. Likewise, property tax revenue is based on the value of land and buildings in an area, so the more valuable the real estate, the more money is collected.

The problem is that when an individual suburb collects sales tax only from its very small area, it creates a perverse incentive to overbuild retail and pirate sales from neighboring jurisdictions. And when property taxes are collected from small jurisdictions, older areas tend to be put at a disadvantage, since newer areas tend to have higher property values and more affluent citizens. This in turn perpetuates inequality, as citizens of the higher-tax areas are able to fund high-quality schools and other services.

The solution is to share local sales tax revenue and some property tax revenue among all the jurisdictions in a region. Areas already sharing their sales taxes have found it to be successful way to deter retail piracy and inter-jurisdictional competition. Property tax sharing is also already in effect in a number of regions. For example, the Twin Cities region has been sharing 40 percent of the increase in commercial-industrial property taxes since 1971, and it has gone a long way towards reducing tax-base disparities, helping older areas remain vital.

No “TIFing” of sales tax

Although TIF usually diverts property tax, several states such as Missouri also allow the local share of the sales tax increment to be “TIFed.” If a TIF project consists of paving a cornfield to build a mall, all of the sales tax from the site is new, so all of the local share of the sales tax could go to subsidize the development, instead of supporting public education or other services.

Most states restrict TIF to the property tax increment only, and states that currently allow sales tax TIFs should amend their laws to follow their lead. This will protect revenue for public services and remove some of the incentive for local governments to gamble away their future tax revenues in attempts to compete with their neighbors to build more stores.

No subsidies to sprawling retail

For all the reasons noted above, states should deny subsidies altogether to retail deals. There is one justifiable time to subsidize retail: to help revitalize a truly depressed inner-city neighborhood that lacks basic retail such as food, drugs, and clothing.

Many local governments do just the opposite, aiding big-box stores that contribute to sprawl and squeeze out their smaller competitors. Wal-Mart, the world’s largest retailer, is a prime example. Good Jobs First documented over $245 million in economic development aid given to Wal-Mart stores. This figure is likely just the tip of the iceberg, since it represents only those cases in which subsidies were reported in newspaper articles available in electronic news archives, and it does not include aid to Wal-Mart’s distribution centers (see Shopping for Subsidies).

Many governments do not bow to pressure to open their wallets to retailers. While there are many examples of subsidy proposals voted down by city councils or voter referenda, the best practice cases are those states and cities that pass laws explicitly prohibiting subsidies to retail. One example is California, which amended its state redevelopment law in 1993 to prohibit subsidies to retail projects on five or more acres of land previously undeveloped for urban use.

Inclusionary zoning

After a neighborhood is built or rebuilt, who will live in its homes? Inclusionary zoning (IZ) is a deliberate attempt to include people of different socioeconomic backgrounds in a development project.

IZ provides incentives to developers to make a specified percentage, usually 15-20 percent, of new housing affordable to low and moderate-income households. Developers receive fee waivers, expedited building permits, density bonuses, or favorable zoning variances in exchange for agreeing to set aside a certain amount of new housing as affordable. Some versions of IZ are mandatory, while others are voluntary. Some require that the developer build new affordable housing units, while others allow the developers to contribute to an affordable housing fund instead.

IZ has a long history of success in suburban areas such as Montgomery County, Maryland, and has recently been adopted by a growing number of urban jurisdictions, including Cambridge, Massachusetts. Legislation supporting IZ has also been enacted at the state level in states such as California, New Jersey, and Minnesota.

More information

Material for this page was drawn from Greg LeRoy, The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation, San Francisco: Berrett-Koehler Publishers, Inc., 2005.

For more on smart growth and good jobs, see the Smart Growth and Working Families project pages of our website, and also the following Good Jobs First publications:

Greg LeRoy and Sara Hinkley, Smart Growth and Workforce Development, Good Jobs First, 2000, at

Greg LeRoy, Talking to Union Leaders About Smart Growth, Good Jobs First, 2001, at

Philip Mattera and Greg LeRoy, The Jobs Are Back in Town: Urban Smart Growth and Construction Employment, Good Jobs First, 2003, at

Greg LeRoy and Sara Hinkley, Another Way Sprawl Happens: Economic Development Subsidies in a Twin Cities Suburb, Good Jobs First, 2000, at

For more on regional sharing of property tax revenue, see Myron Orfield, Metropoltics: A Regional Agenda for Community and Stability, Brookings, 1997.