COMMENTS ON 2017 REPORT OF ECONOMIC DEVELOPMENT TASK FORCE

 

I have reviewed the 2017 report of the Economic Development Task Force and the Committee is to be complemented on its concise summary and focused emphasis.

 

I generally concur in the contents of the report, but considering that my voice in the Legislature will be silenced in just a few months I feel compelled to share my observations and morsels of experience regarding that elusive phenomena loosely labeled  “Economic Development” garnered over the last 7 years in service on numerous economic development special studies, taskforces, and committees and as the senior member of the Revenue Committee and the Planning Committee.  Wide ranging deficiencies stand between the present and a future of what might be, deficiencies which are painful to address and easy to deny.  Were I to have more time to refine these observations I could be more certain of their accuracy, but term limits are what they are and I am obligated to speak now or forever hold my peace. 

 

Just over a decade ago, largely at the behest of Governors seeking accolades for cutting taxes and egged on by interstate gamesmanship, the Legislature embarked on a two pronged approach to economic development.  The first prong was a series of tax cuts and revenue reducers designed to grow the economy by shrinking government.  The second was an intensification of large business incentives designated as Nebraska Advantage, together with approximately a dozen other limited subsidy programs such as the New Markets Program, Historic Credits, Business Innovation,  Bio Science, Beginning Farmer, Micro Enterprise, turn backs,  etc. The resulting reduction in revenue is on the order of three quarters of a billion dollars per year, perhaps significantly more, depending on the redemption rate of Advantage Act credits.  

 

During the same decade the state received approximately $600M in extraordinary one time stimulus from the federal government and $120M in accelerated tax payments triggered by taxpayers wagering that federal taxes would go up if Washington was unable to resolve “the fiscal cliff”.  Nebraska traditionally has lagged behind the national experience, but following the 2008 financial crisis, which crippled more sophisticated economies, its basic agrarian economy fared exceptionally well.  Its good fortune was buoyed by a rare anomaly which caused a dramatic, albeit short lived, spike in commodity prices.  An unprecedented amount of money flowed into the agricultural sector. 

 

If tax cuts and special business incentives were an effective economic development tool, Nebraska should be basking in the fruits of its bounty.    It is not!

 

Instead, last year the state saw its reserves halved, revenues tumble, extraordinary measures taken to strip tens of millions from a previously approved state budget, payments delayed,  administrators squeezed to defer expenses on necessities, job vacancies unfilled,  and sophisticated accounting maneuvers (reminiscent of those used by corporate raiders) employed to produce the constitutionally mandated balanced budget.   As 2018 begins, Nebraska faces the real possibility that 2018 will be deja vu all over again.  As the national economy rebounds, Nebraska is returning to the norm and its traditional position, low on the economic totem pole.

 

Nebraska’s communities can be come in four basic forms: rural agriculture, small, medium, and large. Demographic trends foretell future of each to a high degree of probability. 

 

Agriculture will continue its centralization at the same breakneck speed as it has over the last half century which saw the small independent family farm eagerly give up its milk cows, laying hens, and feeder pigs; bulldoze its shelterbelts and homesteads; and morph into a mere cog in a complex food chain totally dependent on the genetics, chemistry, fuel, technology, and engineering of the corporate and financial world.    Local estate planning lawyers and accountants packaged the farms and ranches into  LLC’s, Corporations, Trusts, and intra familial associations and set them on an irreversible course of  increasing size and fewer numbers.  As the heirs to those estates come to grips with frustrations of familial corporate management, the inability to remain viable against the “bigger”, and an abhorrence to paying tax on the liquidation of appreciated assets, the normal corporate evolution will take place through an era of mergers and acquisitions.   Irrespective of who owns title to the land, it will be controlled by sophisticated finance and remote management.    Drone equipment will till the land, harvest its fruits, and raise and slaughter the livestock with unprecedented economic integration and only a small core of personnel needed in the field.   Corporate, vertically integrated agriculture will dominate agriculture.   The land and water will produce more grains and meats than ever imaginable in any other configuration.   Barring a severely disruptive event, such as the eruption of Yellowstone, Nebraska land and water will be an integral part of the planet’s breadbasket.   Wise governance would plan for the inevitable.  As an example, it would question just to whose benefit would agricultural property tax reduction inure to?   It is a reasonable projection that the bulk of any property tax savings in the pocket of the small and vanishing will be usurped by increased input costs levied by the corporate vendors.  Once the morphing is complete reduced property tax reliance together with agricultural input exemptions, and clever multi-state accounting tactics pushing income to non-income tax states and allocating expenses to income tax states will mean corporate access to the state’s infrastructure with the ordinary taxpayer bearing the load.

 

Half of Nebraska’s communities have less population than Lodgepole’s 317.   Once refuges from repression by religions and nobles their decaying main streets tell a story of the excitement of freedom and the anticipation of the future that is so indicative of an ascending society. The old timers will point out the ghosts of beer halls, schools, opera houses, blacksmith’s shops, dance parlors, general stores, gambling rooms, churches, banks, bakeries, and brothels.  Then came the drought, the depression, the Great War, and the tractor, combine, and corn picker.  Those forces cast the vast majority of communities under 5,000 in population on a glide path to oblivion that spans most of the last century.  The slope of the glide path is inverse to efficiency in agriculture.   There is no credible reason for that trend to reverse.   Efforts to repopulate the small communities are an act of futility in all but the exceptional case.  Not only do they face the realities of geography, climate, and culture, the simple fact is that the people to populate them were never born in the locality and do not choose to move there in meaningful numbers.  That leaves only a costly and unpopular international migration as a possible source of population growth.  Those that show some viability usually have a fountain of public funds as an anchor employer, such as a county seat, community college, public power office, state college, health facility, or correctional unit.   Their demographics show that their population, like that of most of the state,  is growing much older and, with wealth concentrated in fewer and fewer hands, much more likely to constitute a substantial new burden on state finances over the coming decades. 

 

Only about 30 of the State's 535 communities exceed 5,000 in population and many of them attracted basic manufacturing capital and know-how by promising cheap, non-unionized labor and cheap electricity.  No longer is there an endless supply of farm children, with the basic skills such as pounding, cutting, digging, welding, winding, and cleaning, destined to grow up to be reliable, hard working, cheap labor.   Cheap electricity dates to an era where the public power model could realistically be expected to out perform the private power model, an assumption which will come under increasing scrutiny as public power’s engine of creative capital organization continues to be transformed into a cumbersome bureaucracy managing an electric utility.  The bulk of the communities over 5,000 in population will lumber along at low growth of about 3-5% per decade, largely as a result of migration from nearby smaller communities.  They fret over how to get the government to subsidize the housing of the employees of those possessing know-how and capital;  try to develop a system of early indoctrination to confine young human resources to the community of birth by “initiating age-appropriate career education as early as elementary school… with the goal of preparing students for an immediate career” in the local economy upon graduation; seek to bestow on the lords of capital and know-how a non-union workforce trained at taxpayer  expense; behave as though STEM is an acronym for Students To Enter Manufacturing instead of Science, Technology, Engineering, and Mathematics;  and in the name of “keeping our kids here”  bait the traps with the title,  “Academy”.  Healthy economies welcome diversity; enjoy labor, technical, and capital equilibrium with the world; and have no use for such machinations that are indicative of a failing paradigm.

 

Having eliminated most of the state as a locus for sound economic development it would seem to leave the metro area, that area within an hour of 16th and Farnam, as the economic epicenter of the State.  That area has a proven ability to grow largely as a refuge for population leaving the rural areas and often as a result of tremendous state investment in state government and a University system which attracts the young to study and mate.  It has a good number of people with extraordinary wealth that invested much of their time on the planet in it.  Insurance companies find a favorable regulatory environment and take advantage of the situation.  It has staked its future on growth that is contingent upon it having ample rural population to draw from and superior performance of investments made there.  In the plethora of Internet rankings the area manages a favorable presence.  It has a world class zoo and a heavily endowed medical center that has perhaps broken the glass ceiling of national recognition. However, the mainstays of the philanthropy are aged and their heirs may have less loyalty.    It sports only one building that qualifies as a sky scraper.   Its airports offer limited schedules and few direct flights to necessary centers of commerce. It is much too familiar with 100 degrees in the shade in the summer and a high of zero in the winter.  One of its longest slopes is on the county landfill and the metro beach is on the river.  Much of its infrastructure is old and the sewer system is under federal mandate as a result of mixing sewage with rain water and discharging it into the river.  It lacks amenities offered by larger cities such as subways, sky trains, major league ball teams, world class museums, and casinos (although a short distance to the east in Iowa there are several feasting on Nebraska money at the rate of about $10 per second).    It is haunted by the dysfunctional reality that two divergent Nebraskas must be integrated into a single policy resulting in burdens that its interstate competition doesn't have, such as the Nebraska Universal Service Fund which is funded mostly by assessments on subscribers to metro communication service at a rate that is the highest in the nation and which mostly has the purpose of subsidizing a limited number of incumbent rural, local, legacy phone companies.  Those rural areas of the state not already covered with adequate  service from  the national cellular companies could be better and economically served by local public power companies that have the resources to do the job but which are prohibited from doing so by a barrage of political contributions from the legacy phone companies facilitated by the fund.

 

At the same time, similar clouds are forming over the metro area brought on by increasing pressure from the agricultural estates that desire the income and sales tax resources of the metro area be tapped to pay more for the education of the estate heirs and do so in proportion to the size of the estate. Although the metro area may be near the densities needed for critical mass in the insurance world and at the medical center, it is still in a remote area with low population, still haunted by a peasant past, and still without the excitement that comes from pursuit of the grail of great imagination and future value.  Although it likely will fair satisfactorily, the metro is far from guaranteed a good long term showing in the national economic competition of geography, climate, and culture.  Never-the-less, for all practical purposes, Nebraska has all its non-agricultural eggs in a single nest high in a windblown tree.  Additionally, a fair argument could be made that the University, which should be the agent of enlightenment, education, and modernization is so encumbered by its finances, so indebted to its alumni, and so moored to the culture of the 19th century that it shudders at the prospect of controversy and even panics at the thought of a losing college football season, publically fretting about the weakening of its brand.  The University which should be at the forefront of  development instead seems to have acquired 3 functions: satisfying an insatiable craving for athletic amusement, serving as a conduit into the metro area of a very large amount of the state’s resources, and generating a subsistence level of post secondary education for the state.  With so many generations of the state’s young people having attended, the resulting intellectual inbreeding endangers the ability to educate.  Despite its world class promotional department with the very best glossy, multicolored brochures touting its self perception as top tier, it may well be more a part of the economic problem than a part of the solution. 

  

The peasants, having the fruits of their harvest taxed to fund royal excesses,  having suffered their offspring being conscripted to fight hundred year wars, and  having become settlers fleeing repression found an inhospitable but fruitful prairie limited only by their imagination.  On that prairie they developed farms, ranches, beer halls, schools, opera houses, blacksmith’s shops, dance parlors, general stores, gambling rooms, churches, banks, bakeries, and brothels; conceived a unique way of organizing capital neither capitalistic or  socialistic, but public power; mandated a public school system free of the trappings and doctrines of religion; built a magnificent capitol and adorned its rotunda with mosaics of fruited plains, bared breasts, and unclad genitals; inoculated themselves with the power of Initiative and Referendum as a defense against those that might return them to servitude and inequality; vested law making and budget power in a Legislature elected by local citizens with local resources and independent of party hacks and distant influences; and limited the power of the Executive and the privileges of the wealthy.  Is it their fate that their progeny now be returned to that status from which they came? In the name of economic development are we now compelled to finance a tax haven for the new nobility, the lords of finance and capital and multimillion dollar agricultural estates?  Must we fund religious doctrine and indoctrination? Must we bend a knee to political dogmatism and dark alliances?  Must once again there be surrender to the overlords? 

 

If we are to indeed pursue the elusive butterfly of growth the multitude of issues raised by these comments, often only in passing, and many others must be addressed.  To do otherwise and obsess over how to cut taxes, wither away government, and impose morality simply panders to the human psyche’s affinity for easy solutions and quick fixes and serves only to perpetuate ideologies which are the antithesis of the adaptation necessary to enter into the future

 

Are we powerless to intervene in fate as cast before us?  Probably yes, but maybe no.

 

Four matters of housekeeping:

 

1.   Issuance of new tax incentives must be terminated immediately.  Every new credit issued  for program, the value of which study after study has failed to substantiate, is a debt the state cannot afford.  The system has cleverly played the Legislature and won sunset postponement after sunset postponement after sunset postponement.  A novice Legislature will bite on the lure of a postponement time after time, after becoming convinced by its benefactors that if the witch doctor is fired it may cease to rain.  How many studies with the conclusion that the incentives are expensive experiments with mixed and questionable results, and certainly not productive enough to justify their costs, does it take in order to take action?  The urgency of the situation cannot be overstated. The cost of the existing incentives is staggering and threatens the Legislature’s ability to entertain any more productive options.  Policy alternatives are severely restricted by the fact that it has already made more commitments than it can afford and those commitments extend out a decade or more.  With the printing of every new credit the situation compounds.  To the extent that a productive incentive program can be devised, it may not be affordable for a decade or more.  In their current configuration the incentives could easily, and perhaps already have, enabled a new plutocratic mechanism.  Hundreds of millions of dollars in outstanding incentive credits function as a like amount of demand notes.  The holders have the exact power behind closed doors to demand favorable treatment and policies as would a creditor with the power to bankrupt the state or determine the fate of ambitious politicians.  It is the exact phenomena sought to be prohibited by the constitutional provisions against debt.  In fact, the only remote chance to free the state from the shackles of a program gone array may be through a law suit to have them declared unconstitutional.

 

2.  Action should be taken to harmonize the marginal income tax rate with the effective rate.  Having many pay 6.84% income tax while others making substantially more paying 4%, or less, is unconscionable.  All should pay a lower rated instead of the privileged few paying little and all the rest paying more. Strong reserves must be rebuilt lest they not be there when needed.   In the lust for economic development it cannot be forgotten that the state cannot borrow money and when the cash runs out and the accounting tricks are exhausted there must be a tax increase or structural slashing of public infrastructure.  Either will result in profound economic disruption.

 

3.  The federal tax changes cast Nebraska on the horns of a dilemma in corporate income tax policy.  On one horn, no piecemeal incentive program can overcome the disincentive of a 7.81% state corporate income tax juxtaposed on a mere 21% federal rate.  If indeed large corporations with cash parked overseas repatriate that money and invest it here, 7.81% prices Nebraska out of the market for a share of the investment.  On the other horn, the price to adapt is likely over a hundred millions dollars per year that the state does not have.

 

4.  It is indefensible that the agricultural estates receive a 25% discount on property taxes (and want a bigger one); receive a disproportioned share of the property tax relief funded by income and sales taxes paid by working families; and then upon liquidation of the estate by the heirs, about half of which live out of state, do not pay an estate tax or a capital gains tax on the appreciation in value during the ancestor’s lifetime (a tax the ancestor would have had to pay during life). 

 

Admittedly such triage on a broken system will not bring economic development, whatever that is, but what if we were bold, really bold?  What if we did something not done before?  What if instead of being a Johnnie-come-lately to the party Nebraska did something first?  What if demographics could be made to work for us instead of against us?    What if large existing assets could be leverage to create something new, desirable, attractive, and of extreme value decades from now?  What if Nebraska does not need to have all its eggs in one nest?  What if it is us, our state constitution, laws, regulations, taxes, presuppositions, culture … all of it, that stands in the way of adapting to this new and enchanting environment?  What if we could free ourselves from the echoes of the past and the clatter of the present, cut the moorings, bring our mast to full sail, and cast out into the open sea knowing such an open sea is more so than any sea before it?  What if a global giant or assemblage of giants could be enhanced and its greatness amplified by us simply getting out of the way and letting it plant an acorn destined to grow into a great oak to grace the prairie one hundred years from now?   What if we heard the nearly imperceptible beckoning of the future and willed greatness?

 

 

Paul Schumacher-Member of the Legislature