< Previous84 NOVEMBER 2018 SI T E S E L E C T IO Ninvestors in the qualifi ed Opportunity Fund and invests all $ million within days of the sale of her business.If Jane keeps her investment in the qualifi ed fund until December , , instead of paying $, in federal tax by April , , $, of tax will be due by April , . e tax reduction is attributable to the -percent basis bump after holding the Qualifi ed Opportunity Fund for fi ve years and an additional -percent basis bump for holding the Qualifi ed Opportunity Zone for seven years. Additionally, she will pay $ tax on any profi t she makes of the $ million. Rural vs. Urban OpportunityA great divide in economic opportunity between rural and urban areas has been in place since the Great Depression. e Opportunity Zones legislation seeks to change this inequitable narrative. Opportunity Zones are misconceived as only providing economic benefi ts to rural areas. In fact, many Opportunity Zones are in urban areas. To illustrate this point, it is important to understand how three cities are preparing for investments as part of the Opportunity Zone legislation. Bruce Katz and Jeremy Nowak have been instrumental in the creation of Opportunity Zones legislation. Both individuals have been working with Accelerate for America to help three U.S. cities develop an urban investment prospectus tailored for use in the Opportunity Zones. Mr. Nowak passed away this year, but Mr. Katz continues to work with Accelerate for America in bringing investments to Oklahoma City, Oklahoma; Louisville, Kentucky; and South Bend, Indiana. Oklahoma City is focused on overall revitalization and economic development, while Louisville is targeting social impact. South Bend is concentrating on improving the town-gown relationship with University of Notre Dame.Spotlight: Oklahoma City’s Opportunity Zone and Innovation District rough its work with Oklahoma City, a current client, Pegasus was aff orded the opportunity (no pun intended) to learn fi rsthand how Oklahoma City is preparing for the Opportunity Zones. Pegasus is part of a team led by Perkins & Will, working for the Alliance of Oklahoma City, to create a land use and strategic development plan for creating an Innovation District adjacent to downtown Oklahoma City. e Innovation District is a .-square-mile area (roughly , acres) where the Oklahoma Health Sciences Center, OU Medical School, and other health-related institutions are located, along with private companies working on research and development. Much of this land was acquired through years of urban renewal, where neighborhoods adjacent to the Innovation District are now impoverished. e majority of the OKC Innovation District also happens to be within an Opportunity Zone. e OKC Urban Renewal Authority (OKURA) also owns a signifi cant amount of land within the Innovation District. e Innovation District is poised to attract signifi cant private investment for research and development, offi ce, retail and residential development. Pairing the OKURA properties with a TIF District (tax increment fi nance zone), the Opportunity Zones’ incentives create a uniquely attractive investment opportunity, which OKC is capable of implementing.“ e Accelerate for America program is working with Oklahoma City to create an investor prospectus to spur economic development,” says Alliance Executive Director Cathy O’Connor. “OKC is in the vanguard of the next new investment tool for community reinvestment. We are very excited to be chosen for this program, as it complements the many other projects OKC has seen in and around downtown over the last years. We anticipate that the Opportunity Zones will help with reinvestment throughout OKC, but are very excited about how this incentive can complement the Innovation District strategy we will begin implementing in .”We anticipate that the Opportunity Zones will help with reinvestment throughout OKC, but are very excited about how this incentive can complement the Innovation District strategy we will begin implementing in 2019.”— Cathy O’Connor, Executive Director, Alliance of Oklahoma CityWe anticipate that the Opportunity S I T E S E L E C T I O N NOVEMBER 2018 85Sean Garretson, AICP, is President at Austin, Texas-based Pegasus Planning and Development, specializing in economic development analysis and policy, land development and plan implementation. For more information, visit www.pegasusplanninganddevelopment.com.1031 Exchange or Opportunity Zone?Some investors call the Opportunity Zones a “ exchange on steroids.” e ability to reduce tax liability and not incur taxes on sale proceeds in the future is a massive benefi t. Additionally, the tax deferral is available for any capital gain, not just “like kind” real estate. e “catch” is that these investments must be through a qualifi ed Opportunity Fund as designated by the Treasury.Most experts agree that this tax incentive will not only provide communities with an infusion of capital investment, but it will also off er investors a tremendous tax deferral incentive. e fi nal regulations should be released before the end of , after which many cities (in addition to Oklahoma City, Louisville and South Bend) are expected to capitalize on these incentives. Investors can participate today in Opportunity Zone funds and begin realizing the long-term economic gains of their investments. Have We Reached Foxconn Level 5?Four reforms could help governments dial back incentives to sustainable levels.by TIMOTH Y J. B AR TIKe ditor @ site s ele c tion.c omINCENTIVESTim Bartik, Ph.D., is senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Michigan. His research focuses on how broad-based prosperity can be advanced through better local labor market policies. His book “Who Benefi ts from State and Local Economic Development Policies?” is widely cited as an infl uential review of the evidence on how local policies aff ect economic development. His more recent work includes developing a database of U.S. economic development incentive programs, studying policies promoting local skills and their eff ects on prosperity, and examining how early childhood programs could promote local economic development, explored in his book “Investing in Kids.” Bartik has also done extensive research with colleagues on the eff ects of the Kalamazoo Promise, a pioneering place-based scholarship program intended to improve the local economy.At Site Selection’s invitation, here Bartik presents an adaptation of his recent work developing a simulation model of incentives’ benefi ts and costs.86 NOVEMBER 2018 SI T E S E L E C T IO N88 NOVEMBER 2018 SI T E S E L E C T IO NCurrent trends in economic development incentives are unsustainable.Based on my 2017 database (Bartik 2017), state and local business incentives tripled from 1990 on. The recent Foxconn incentives deal is 10 times as large per job as the average incentive deal. If Foxconn-level deals are widely imitated, incentive costs might dramatically escalate. Can such incentive trends be sustained? That seems doubtful.Business productivity depends in part on public services — good schools and good roads. Business also depends on after-tax real wages to support consumer demand. Excessive incentives threaten public services and after-tax real wages.More sustainable incentives can be achieved with reforms that cut costs, while simultaneously making incentives more productive. My suggested reforms:1. Put budget caps on incentives. Incentive budgets must allow state and local governments to adequately fund public services that support the private economy, such as education and infrastructure. 2. Govern incentives by rules to limit expensive one-time deals. When incentives get to Foxconn levels, they face diminishing returns. Costs increase more than the probability that the incentive tips the location decision. 3. Cut back on incentives by targeting high-multiplier industries. Incentives have higher benefit-cost ratios if they go to firms in high-tech industry clusters.4. Balance tax incentives to larger firms with business services to smaller firms. Customized business services to smaller S I T E S E L E C T I O N NOVEMBER 2018 89fi rms — such as community college job training and the Manufacturing Extension Partnership network managed by the U.S. Department of Commerce’s National Institute of Standards and Technology (www.nist.gov/mep) — are times as cost-eff ective as tax incentives in creating jobs. Bene ts vs. CostsTo analyze diff erent incentive policies, earlier this year I constructed a model of local economies. is model was based on research on how business location decisions respond to incentives, how job growth aff ects migration and employment rates, and how growth aff ects state and local government fi nances. e model makes realistic assumptions about how incentives aff ect business location decisions. Foxconn-level incentives might tip business location decisions over three-quarters of the time, but more typical incentives have been shown by research to tip less than one-quarter of business location decisions. An analysis should recognize that growth not only increases tax revenue, but also increases spending needs. Job growth attracts population growth, which in turn drives the need to hire teachers, widen roads, etc. is model compares a baseline incentive package, with baseline policy parameters, versus alternative packages that consider diff erent parameters. e purpose is to see how benefi ts and costs vary with diff erent policies. Each alternative scenario varies only one parameter from the baseline scenario. e baseline incentive package was set equal to the average tax incentives provided by the average state. I assumed that the jobs created by the incentives had a typical “job multiplier” of . — for each job directly created by incentives, . additional jobs are created in local suppliers and local retailers. I assume that the incentives’ budgetary costs are paid for by some combination 90 NOVEMBER 2018 SI T E S E L E C T IO NLocal Bene t-to-Cost Ratio for Different Incentives Scenarios8.06.04.02.00.0-2.0-4.0-6.00.31.2-3.44.06.8Baseline PolicyFoxconn-levelIncentivesEducation cutFinancingHigherMultiplierCustomized services to smaller businessesof increases in other taxes and reduction in public spending, but without severe consequences for any one budget category.For both the baseline package, and the alternative scenarios, I analyzed the benefi ts of each package as its eff ects on the incomes of local residents. ese include eff ects on the real earnings per capita of local residents, as well as any eff ects on profi ts of local businesses, and fi scal gains for state and local taxpayers. e graph reports the “benefi t-cost” ratio of each incentive package. is is the ratio of the total income eff ects for local residents and businesses, divided by incentive costs. I consider the present value of these income eff ects over time, with appropriate discounting of future S I T E S E L E C T I O N NOVEMBER 2018 91incomes. To break even, an incentive package must have a benefit cost ratio of 1.0 or greater. The average incentive package in the U.S. has a benefit cost ratio of 1.2 —benefits are 20 percent greater than incentive costs. Incentives pay off for local residents in higher earnings and some fiscal gains, but only modestly.But Foxconn-level incentives, of 10 times as great, only have a benefit cost ratio of 0.3—the benefits are 70 percent less than the incentive costs. Incentives have diminishing returns because higher incentives do not proportionately increase the odds of tipping the location decision. Incentives that are totally financed by cutting spending on K-12 education have a negative benefit-cost ratio. Cuts in K-12 spending lead to cuts in future wages. If the incented firm has a high local job multiplier of 6 — which is supported for some high-tech firms — then the benefits of incentives are four times their costs. The job growth due to cluster effects can be large.Finally, business services to smaller businesses have a high rate of return. Helping smaller businesses with job training, or advice on improving productivity, is cheap compared to what it does for local job creation. Sustainable economic development strategies should be balanced. Tax incentives to large firms must be moderated to be consistent with maintaining needed public services. Customized business services are needed to help promote a healthy local small business sector.Such a balanced strategy makes more sense than escalating the incentive wars to Foxconn levels. 92 NOVEMBER 2018 SI T E S E L E C T IO NWhen it comes to major enterprise data center investment, Virginia and Sweden have a common pro-business attitude, even if they’re separated by degrees in latitude.Most would call Northern Virginia the data center capital of the U.S. But the latest Virginia project is landing in Henrico County (Richmond region), where Facebook in September followed up a $ -billion commitment in with a pledge to invest another $ million, growing the site from two buildings to ve. Facebook anticipates that the expanded site will support over jobs once operational and will require more than , construction jobs at peak. e site is taking shape at White Oak Technology Park, where In neon once made semiconductor chips on a former Motorola and Qimonda site, but closed in , laying o thousands — QTS now operates a data center on that property. Facebook’s parcel is adjacent.Site Selection Executive Vice President Ron Starner recently talked to Facebook executive Melanie Roe about the project.“ e Henrico County location o ers a lot of the items we look for when selecting a site for a data center,” she says. “ is speci c location — similar to Papillion, Nebraska — o ers excellent access to ber, as well as good water and sewer infrastructure. Virginia also o ers access to renewable energy resources, a strong pool of talent and a great set of community partners.” e entire complex will be powered, she says, “with -percent clean and renewable energy through Virginia Electric and Power Company (Dominion Energy), utilizing a new tari (Schedule RF) in conjunction with the existing GS- tari . Schedule RF contemplates a unique arrangement whereby new speci c renewable resources serve the Henrico Data Center.”Asked what role incentives played, Roe says, “Tax incentives are a standard part of competitive site selection e orts such as this. e Commonwealth and County provided incentives and contributed to public infrastructure improvements to support the project. We are investing hundreds of millions of dollars in the project, which we anticipate will support thousands of construction jobs and dozens of long-term operational jobs in the region.”All Downhill From HereIn cloud lingo, it’s all about availability zones. IBM Cloud, for example, continues to build out its -location cloud footprint with newavailability zonesin high-demand centers in Europe (Germany and UK), Asia-Paci c (Tokyo and Sydney), and North America (Washington, DC, and Dallas, Texas).For skiers, the availability zone applies to length of slope and depth of snow. In the Stockholm region, one data center’s big dig will help make this coming ski season’s downhill runs just a little bit longer. Eskiltuna is one of three Swedish locations receiving major investment from Amazon Web Services (AWS), which announced a new AWS Region in Sweden in April .“ is will be the fth AWS Region in Europe, joining four other Regions there —Europe (Ireland),Europe (London),Europe (Frankfurt)and an additional Region in France expected to launch in the coming months,” blogged Je Barr of AWS in April , noting that AWS now has zones in total.It just so happens that the nearby Vilsta ski area was approved in spring to raise its slope, but only if non-polluted material was used for ll. e material AWS was removing for its data center was perfect. Now the slope will be meters longer, and also allow for the building of a slope for giant slalom with ve to seven more turns.“We will save ve to six years of work by using the masses from the AWS construction and be able to make the Vilsta slope more attractive to visitors,” said Magnus Nilsson, president of Tunafors Ski Club.“Investments are not just about job creation and economic e ects. ey can also have a huge by ADAM BRUNSadam.br uns @ site s ele c tion.c omProjects on opposite sides of the Atlantic show how data centers can fortify regions in more ways than one.D A T A CENTERS S I T E S E L E C T I O N NOVEMBER 2018 93positive impact on the local community,” said Tomas Sokolnicki, head of Data Centers by Sweden, Business Sweden, before engaging in punsmanship: “Building a higher ski slope is just one way that investments can create a real ‘snowball e ect.’ ”Christina Bergstrand of Business Sweden says , cubic meters have been removed from the building of the AWS data center, transferred to the ski site in , loads.“ e ski lift is being built and everything is expected to be ready [by the] beginning of next year in January or February,” she says, noting that the municipality is nearly doubling its water extraction request to make snow. After all, snowmaking, like data center operations, requires signi cant water use.Nordic Nerve CentersAn AWS spokesperson says Nordic customers were early adopters of the cloud, and that is one of the reasons AWS has steadily increased its presence in the Nordics over the past years. Bergstrand says the AWS projects in the region have increased interest from companies, including “more international companies curious about the regions.” AWS launched its Pop-Up Loft — a temporary event and community space — this past summer, and its summit in Stockholm had , visitors — four times more than in .Business Sweden’s Bergstrand says US$ billion has been invested in data centers in the Nordics, with Sweden accounting for around a third of that growth and a sunny outlook ahead: Facebook in May committed to further investment at its site in Luleå where it rst decided to establish a data center in and has invested $ . billion to date. Google is acquiring property in Horndal in the Avesta municipality for its own data center yet to come.“We cut the tax on electricity in Sweden a year ago, which has increased the international interest for locating data centers,” Bergstrand says. A nearly carbon-neutral power supply helps too.According to Business Sweden, the data center industry in the country is currently growing at an estimated percent per year, and is expected to employ , people by . Next >