States Consider New Ways to Create Jobs

By Jennifer Burnett, CSG Senior Research Analyst
In his State of the State speech earlier this year, Montana Gov. Brian Schweitzer made clear what he hoped to accomplish in 2011: Create more jobs in his state.
“Please bring me bills that unite Montana. Bills that help businesses and create jobs and bills that prepare our students for a better tomorrow. I’ll sign them,” Schweitzer, the 2011 president of The Council of State Governments, told legislators. “The people who sent us to this capitol had two messages for us: Work together and create more job opportunities in Montana as soon as possible.”
Just like in Montana, job creation is a top priority in state capitols across the country. Since the Great Recession began in 2007, the U.S. has shed millions of jobs and unemployment has remained high. In 2010, 15 states reported unemployment rates of 10 percent or more, above the national average annual rate of 9.6 percent.
To address the high unemployment rates and to help close estimated budget gaps totaling $112 billion for the upcoming fiscal year, many states are beginning to systematically reassess their current economic development strategies and incentive programs—including business tax incentives and corporate tax rates in general.
In Michigan, where the unemployment rate has been and continues to be among the highest in the country, job creation and economic development are of paramount importance. In past years, the state has received attention for its strategies to bring in new kinds of business, like the film industry and renewable energy. Due in part to heavy spending on subsidies, the Environmental Law and Policy Center, a public interest environmental legal advocacy and eco-business innovation organization headquartered in Chicago, ranks Michigan as first in the nation for clean energy patents and fourth for the number of jobs in the solar industry. And the state has been able to attract big Hollywood films like Transformers 3 and Cedar Rapids by offering big incentives to filmmakers.
In his first term as governor, however, Rick Snyder has proposed major changes to the state’s economic development policies. Chiefly, the governor wants to reduce the tax liability broadly to benefit all of Michigan’s 250,000 businesses, rather than focus on targeted incentive programs. For example, the governor has proposed a 6 percent flat corporate tax, which has been reported by the state House Fiscal Agency to “amount to an 86 percent cut in business tax revenues to the state by the 2012-2013 fiscal year.”
According to Michael Finney, president and CEO of the Michigan Economic Development Corporation, the way incentives are used may change dramatically in the coming year.
“In 2010, we spent nearly $300 million on all state development programs, including over $60 million on the film industry, with no annual budget on incentives,” he said. “Now, the governor has proposed budgeting incentive spending at $50 million for the upcoming year, plus $25 million for film subsidies and an additional $25 million will be available for assisting start-ups and entrepreneurs, a change in strategy that offers broad tax relief to all businesses and requires less in tax incentives.”
In Virginia, having a broad-based approach to development and incentives is a priority—and that is one of the reasons state development efforts have been successful, according to Christie Miller, spokeswoman for the Virginia Economic Development Partnership.
“Virginia has established a highly competitive environment for business attraction and development by promoting lower business costs, and by offering a strong, educated workforce and well-developed infrastructure rather than focusing on individual incentive programs,” said Miller.
Virginia’s overall strategy will likely remain the same in the coming years. “Our new governor is very pro-business and we are receiving a tremendous amount of personal support and enthusiasm from his administration to continue on our current path,” said Miller.
In addition to maintaining an overall environment conducive to business attraction, the state also plans to increase its marketing efforts in the coming year, primarily focusing on three target sectors: advanced manufacturing, information technology and energy.
While some states are looking at the type and scope of incentives offered, others are looking at the structure of the economic development agencies themselves. Governors in several states have recently advanced legislation to privatize business recruitment and other development programs.
In February, Wisconsin Gov. Scott Walker signed legislation that creates the Wisconsin Economic Development Corporation, a public-private entity that will be in charge of the state’s business recruitment efforts. Under the new structure, private employees will replace public employees in the state Commerce Department, and other state agencies will handle the department’s regulatory responsibilities. A board of directors including the governor, members nominated by the governor, members appointed by the senate majority leader and members appointed by the assembly speaker will run the development corporation.
Replacing Ohio’s Department of Development with a private, nonprofit corporation was one of Gov. John Kasich’s campaign promises. Last month, he made good on that promise, signing a bill that creates a new entity called JobsOhio, which will be headed by a board of business leaders. Kasich’s proposed budget calls for using profits from the state’s wholesale liquor distribution to fund JobsOhio.
Kristi Tanner, assistant director of the Ohio Department of Development told Bloomberg News that will mean an estimated annual revenue stream of about $100 million for the entity, which is larger than similar arrangements in Michigan, Kentucky and California.
Tanner also explains that this figure depends on the state legislature’s approval of Kasich’s proposal as part of the budget due by June 30, and the exact sum for JobsOhio hasn’t been determined.
And in Iowa, Gov. Terry Branstad is proposing a similar change to replace the state’s Department of Economic Development with the Iowa Partnership for Economic Progress. If approved, the new organization will be a public-private partnership charged with promoting and marketing the state in order to attract investment and jobs.
Supporters say the move to privatization allows the state to be more flexible and better respond to the needs of business.
Graham Toft, who from 1988 to 2001 served as president of the Indiana Economic Development Council, explains: “One of the arguments used for moving to a public-private model is to remove the agency from the day-to-day direction of the executive or legislative branch.”
According to Toft, when a privatized agency is designed well, it can enhance the state’s capacity for negotiating relocation deals with companies, remove political interference from the business-attraction process and speed up response time by releasing the agency from public service rules and accounting practices.
Opponents of privatization, however, argue these agencies can become too independent and transparency is at risk. Toft said these privatized agencies seldom maintain a long-term view of a state’s economic growth. Instead, they tend to focus on making deals to create jobs in the short term.
In the coming year as state leaders modify programs, funding streams and agency structures, the overall goal remains the same: Identify effective, cost-efficient ways to create and retain jobs. During the recent National Governors Association Winter Meeting in Washington, D.C., Harvard professor Michael Porter echoed this sentiment, stressing that no matter the structure or particulars of state economic development strategies, the big goal should be to enhance productivity which in turn dictates fundamental competitiveness.
“This is the only way to create jobs in the long run,” said Porter. “Improving productivity and innovation must be the guiding principles for every state policy choice."
And while some states may be hesitant to expand development programs during tight fiscal times, Porter maintains that having a good development strategy does not necessarily translate into spending more money. “Improving competitiveness does not require new resources, but using existing resources better,” he said.
 

7 KEYS TO STATE COMPETITIVENESS

Porter highlighted the key issues for states when developing a strategy to improve productivity and state competitiveness during the recent NGA meeting. He believes states should: