Category Archives: Economic development

Taxes, Innovation and Virginia’s Lost Mojo

In 1940

In 1940, technological innovation in the United States was concentrated overwhelmingly in the Great Lakes states, the Northeast, and California. The powerful economic force known as agglomeration — in which geographic proximity boosts the productivity of inventors and researchers — acted to perpetuate those states’ lead. Yet over the following six decades, the propensity for innovation, as measured by patents per 10,000 state residents, diffused to Texas, the South Atlantic states (including Virginia), and the Rocky Mountain states. What drove that change?

One likely factor was tax rates — primarily for corporate income taxes, but for personal income taxes as well. And that should be a wake-up call to Virginia. The Old Dominion’s 6% top marginal tax rate for corporations gives the state a crummy 31st rank in the Tax Foundation’s business tax climate index, and its 5.75% top tax bracket contributes to the state’s 9th highest rank for state-and-local income taxes paid per year.

A new study by Ufuk Akcigit, a University of Chicago economics professor, and three colleagues has found that corporate and personal income tax rates have a profound effect over long periods of time on technological innovation. States their paper, “Taxation and Innovation in the 20th Century“:

Taxes affect the amount of innovation, the quality of innovation, and the location of inventive activity.

The effect of taxes on innovation is a consuming question in modern-day economics. Heavily dependent upon anecdotal evidence and incomplete data, the debate has been impossible to resolve decisively. However, Akcigit and his co-authors have set a new evidentiary standard by compiling three new datasets. First they constructed a database of inventors based on historical patent data since 1920, which allows them to track innovations over time, industry, and location. Secondly, they built a database of corporations’ R&D labs and research employment. Thirdly, they created a dataset of state-level corporate and personal income tax rates.

The authors find that personal and corporate income tax rates have “significant effects” at the state level on patents, citations (a measure of the significance of a given patent), the prevalence of inventors in a state, and the share of patents produced by firms compared to those produced by lone inventors.

Corporate inventors are the most “elastic” — economics speak for “sensitive” — to tax rates. Corporations tend to be unsentimental about where they invest. They have less loyalty to a given geographic area. They look to maximize their return on investment wherever they can find it. By contrast, individuals may have strong personal and sentimental attachments to a location. However, when inventors do choose to move, Akcigit has found, they are “significantly less likely” to move to states with higher taxes.

Though a significant factor in shaping the geographic distribution of innovation, taxes are not all-powerful. The authors readily acknowledge the influence of agglomeration effects. Within a given scientific or technological field, inventors like to stay close to the action — in other words, to locate near others in the same field. Often, agglomeration effects are stronger than tax rates.

Bacon’s bottom line: Let me offer a couple of refinements, and then a warning to Virginia.

The authors examine published corporate income tax rates. They do not take into account the impact of corporate tax giveaways — an essential strategy for some states (such as New York) to retain corporate activity and for other states (such as anyone trying to attract Amazon’s HQ2) to bribe corporate investors. Also, they don’t examine how the tax money is spent. In theory, highly skilled and educated inventors prefer to live and work in locations with superior amenities made possible with higher taxes. Finally, they neglect to examine university-generated R&D. It goes without saying that university R&D is tied to the geographic location of the institution (although research teams can be induced to move).

I would argue that powerful forces work to perpetuate the geographic status quo:

  • Agglomeration effects, in which inventors in industry clusters feed off one another. Silicon Valley is a classic example of how agglomeration effects outweigh the negative impact of high taxes and even higher real estate prices.
  • Government and cultural amenities, in which wealthy regions of the country spend more money on schools, higher-ed, and other amenities valued by the educated class, and where philanthropists have endowed local universities, medical centers, and arts & cultural institutions over the ages.
  • Tax-favored institutions, in which leading universities, disproportionately located in the Northeast, the Midwest and California, have accumulated massive tax-exempt endowments that allow them to underwrite the recruitment of world-class research faculty. Insofar as universities serve as anchors for innovation ecosystems, this tax advantage is crucial.

It is remarkable, given the extraordinary advantages of the incumbent innovation leaders, that research and innovation has migrated to other states at all. What allows these other states to compete? Lower corporate and individual taxes is one of the few public policy tools a poorer state can muster.

Once upon a time, Virginia was known as a low-tax, fast-growth state. That is no longer true. At best, we can claim to be a moderate-tax, moderate-growth state. We have neither the advantage of accumulated wealth in the form of world-class research universities, medical centers, foundations, museums, and cultural institutions nor the advantage of lower taxes that attract corporate investment. (Yeah, yeah, the University of Virginia is great, and so is the Virginia Museum, but overall Virginia is strictly second-tier.) Measured by economic performance, Virginia is in the muddled middle. Economic growth is plodding. For the first time in decades, more native-born Americans have been leaving the state than entering it. 

Is our tax policy to blame? Do our tax structures and budgetary priorities increasingly resemble those of the Midwestern and Northeastern states — without the inheritance of vast industrial-era wealth and philanthropy to underpin our economy? I suspect strongly that that’s the case.

To answer the question, it would help to have innovation data more recent than 2000. Economically speaking, Virginia was on a roll then. Today, the state is suffering economic malaise. I would not be surprised to find that our relative innovation standing has declined. Our governor and legislature propose lots of small-small remedies to jump-start the economy, but it’s hard to see how they will amount to much. Virginia’s relative decline warrants far more serious thought than it has received so far.

Oops, Where Did that $3-4 Million Deficit Come From?

The idea behind the Commonwealth Center for Advanced Manufacturing (CCAM) is fantastic: Create a facility where Virginia manufacturers and universities can collaborate on advanced-manufacturing research projects that all participants can share. Research staff for the Prince George County-based facility are expert in everything from “vertical diffusion furnaces” and “robot arm-based automation cells” to “thermal spray coating” and “corrosion crack healing,” and they conduct about $7 million a year in research.

Just one problem: The program is operating at an annual deficit of between $3 million and $4 million a year. Debts include $2 million in unpaid rent to the University of Virginia Foundation and a tapped-out bank credit line, according to the Richmond Times-Dispatch.

Said Secretary of Finance Aubrey Layne: “They’ve got to put together a business plan that makes some sense.”

The Center has procured state and federal funding commitments to build a $12.6 million Advanced Manufacturing Apprentice Academy next door. But state officials, reports the T-D, say they won’t release $9 million in bond money planned for construction of the academy without an answer to the center’s financial questions. Said Layne: “That is not going to happen until this issue is solved.”

Bacon’s bottom line: As I have ranted and raved and inveighed and fulminated, Virginians have no idea how many fiscal land mines are out there. Yes, the Commonwealth has a AAA bond rating (although we have skirted on the edge of a downgrade), but no one has tallied up the long-term commitments, unfunded long-term liabilities, maintenance backlogs, and fiscal tricks of all the local governments and independent authorities set up to serve the interests of the Commonwealth.

After the Petersburg fiscal meltdown, the General Assembly began monitoring the health of local governments, looking for early warning sides of impending financial apocalypse — a big step forward. But no one is tracking dozens of non-governmental entities. Only a couple of months ago, for instance, was the public made aware of a $3.5 billion unfunded pension liability at the Washington Metro mass transit system serving Northern Virginia. Now we learn that CCAM is running a big budget deficit and racking up long-term debt.

The federal government has accumulated a $21 trillion national debt, and soon will be adding to it at a rate of $1 trillion a year — during an economic boom. The Medicare trust fund is projected to run out in 2026. The Social Security trust fund is expected to run out in 2034. Uncle Sam will never collect a big chunk of the $1.3 trillion in student loan debt outstanding, and taxpayers will have to pick up the tab. Meanwhile, states like Illinois and New Jersey are one sharp recession away from fiscal collapse.

As Boomergeddon looms, Virginia traipses merrily along, most recently creating a new Medicaid-expansion entitlement, with no clear idea of its overall fiscal condition. Our lawmakers look no more than two years ahead — the time horizon dictated by the biennial state budget. Although they are attuned to the necessity of maintaining a AAA state bond rating, the credit-worthiness of state bonds is just one piece of the whole. The credit-worthiness of Virginia’s counties, cities and towns is another piece. The credit-worthiness of our state universities is yet another. The credit-worthiness of a plethora of independent authorities is still another. No one, to my knowledge, has analyzed all the pieces as a whole and stress-tested the system. Until we do, we’re flying blind. It is foolhardy to pretend otherwise.

Bacon Bits: Rails, Roads, Hurricanes and Rainbows

Still off the tracks. Despite promising efforts by top-level management, the Washington Metro corporate culture is still dysfunctional. An audit of $1.9 million in blanket purchase agreements found missing and incomplete documents, reports the Washington Times.

“Auditors found that Metro employees failed to record $845,000 as BPAs in their accounting software, a problem the inspector general attributed to poor controls and lack of staff training,” the newspaper reports. “As a result, $1.8 million of the $1.9 million sampled contained internal control issues.”

Long and winding road. Southwest Virginia’s twisty, windy roads have been long considered a barrier to economic development because they are so inhospitable to commercial trucking. But local promoters in Tazewell County have turned Route 16 into a tourist magnet. The road, dubbed “Back of the Dragon,” provides gut-wrenching turns and spectacular vistas. Last year an estimated 60,000 motorcycle and sports car enthusiasts passed through the nearby 4,240-person town of Tazewell.

Chris Cannon, executive director of Friends of Southwest Virginia, told the New York Times: “We focus on natural and cultural assets” rather than coal, tobacco and lumber. The region has a bluegrass heritage trail, a crafts collective, and outdoor activities like ATV, riding, hiking, mountain biking, and river running. “We as a region are trying to diversify.”

Resiliency reminder. Former Hurricane Michael was only a tropical storm by the time it barreled through Virginia, but it still caused havoc. Some 585,000 customers in Dominion Energy’s Virginia and North Carolina service territory lost their electric power. As of 7 a.m. Friday, nearly 450,000 still had lights out. reported Dominion in a press release this morning:

Early reports of damage include broken poles, cross arms and downed wire in many locations, as well as transmission lines impacted due to tree damage. There were multiple reports of tornadoes within our service territory. In Northern Neck, a tornado touched down and damaged a Dominion Energy substation.

I hope Dominion is keeping good numbers. Legislators and the public will want an after-action report, with a particular focus on the efficacy of the utility’s undergrounding program. How many underground lines experienced disruption compared to the number that would have been predicted before the lines were buried? How much time did Dominion’s repair teams save as a consequence, and how many customer-hours of electric outages were avoided?

Who’s got the brightest rainbow? The city of Richmond scored higher on the Municipal Equality Index, a scorecard measuring municipal policies regarding the LGBTQ community, than the People’s Republic of Arlington and the People’s Republic of Charlottesville — and Mayor Levar Stoney is darn proud of it. “I am delighted that Richmond is able to progress at this level,” said Stoney in a recent press release drawing attention to the ranking.

“Diversity and inclusion are … cornerstones for attracting and retaining residents, top talent, and industry,” wrote Richard Florida, author of “The Rise of the Creative Class,” in a letter published in the MEI study. “Cities that do not guarantee equal rights to LGBTQ send a strong unwelcoming message to potential visitors, residents, and investors, stymying their potential for economic advancement. In short, many businesses and top talent consider LGBTQ discrimination a deal breaker. … It pays to prioritize inclusion.”

Bacon Bits: As Virginia Slowly Unravels

Yes, it’s OK to panic. Norfolk Southern Corp., the beneficiary of local incentives a year or two ago when it moved jobs from Roanoke to Norfolk, now is said to be close to announcing the relocation of its headquarters to Atlanta.  “A deal has already been struck,” Norfolk Mayor Kenny Alexander told the Virginian-Pilot. It appears that a decision is “going to be made and made soon.”

This will be a huge morale blow to Hampton Roads. Norfolk Southern is one of only two Fortune 500 company in the Norfolk-Virginia Beach side of the metropolitan area. (The other is Dollar Tree. Huntington Ingalls is located north of the James River.) Let’s hope the City of Norfolk can claw back every dime it gave away.

Spend money to make money? The Washington Metro’s executive and board leadership are in a quandary on how to reverse the decline in ridership. The Washington Post quotes an internal study that proffers some answers: Increase the frequency of service and extend hours, thus reversing the decline in so-called “super riders” who use the heavy rail service 40 or more times per month. Metro has cut back its service in recent years as its financial situation has deteriorated.

But the WaPo article is unclear about whether a restoration of service would pay for itself. The article quotes a lot of numbers, but none answer the essential question of whether the ridership revenue generated would equal or exceed the added expense — a critical issue, one would think, for an organization that (a) operates at a loss, and (b) still faces unfunded capital needs and pension liabilities.

Is it “stop and frisk”  or “investigative detention?” The latest uproar in the People’s Republic of Charlottesville is over the alleged police practice of stop-and-frisk, which allegedly disproportionately targets minorities. Roiling the waters even more, Charlottesville’s Police Chief RaShall Brackney said yesterday that data on the city’s policy — whatever you call it — will be unavailable until it is extracted from a new software system, reports the Daily Progress.

Community activists note that African-Americans made up 122 of the 173 people stopped for what the police calls “investigative detention.” Fifty-five of the stops happened after police were dispatched to an area, whereas 118 of those stops were officer-initiated.

Brackney, who is female and black, disputed the stop-and-frisk label. “We don’t do stop and frisk,” she said. “We do either a mere encounter or we engage a person [in] which we may have a warrantless search and seizure. I will not, I will not, label what we do based on some national trends or what New York has decided to do.”

Boomergeddon watch: From Government Executive: The United States Postal Service retirement health fund will run out of money in 12 years if Congress does not act. Approximately 500,000 retirees rely upon the program. The Postal Service has missed $38 billion in required prefunding payments into the retiree health fund since 2010. Either way, someone is screwed. Either postal retirees see major cuts to their pensions or the taxpayers pick up the multibillion-dollar tab.

Rural Virginia Does Not Need A Marshall Plan

Gov. Gerald L. Baliles

In devastated post-war Europe, millions of people were qualified and eager for jobs or desperate for capital to get their farms planted and harvested.  In demographically-diminishing rural Virginia, farms are mechanized. If you build a huge factory today qualified workers may not come in sufficient numbers.

A scaled-down 21st Century Marshall Plan is a nice rhetorical image, and former Governor Gerald Baliles captured the headlines by using it in a recent speech, but the analogy simply doesn’t fit.  Rural Virginia’s problems cannot be fixed with an infusion of cash.

When Baliles has something serious to say, serious Virginians should read or listen.  After successful turns as legislator, attorney general and governor (pestered but never tripped by the loyal opposition) he returned to private life and never again appeared on the ballot.  That alone sets him apart from today’s career politicians.  He has had a long-standing focus on his native rural Virginia, but his legal career was Main Street Richmond.

“If you were to take the “rural horseshoe” and hold it up against the Golden Crescent, the contrasts are stunning. Two Virginias!  Moreover, according to our community college system officials, if the “rural horseshoe” region were considered a separate state, it would be tied for dead last with Mississippi and West Virginia for educational attainment levels—dead last for citizens with high school diplomas; dead last for citizens with college degrees. Think about that.”

His emphasis on education goes back to his own life experience and that of so many others, my mother’s Southwest Virginia family included.  His critique of Virginia’s failure to hold down higher education costs and provide a high enough share from taxpayer funding is spot on.  As the brisk Bacon’s Rebellion discussions on Richmond’s challenged schools illustrate, however, there are more than two Virginia’s.

The real headline in his talk was the discussion of the Virginia Tobacco Commission’s efforts and the poor results after so many bright ideas, so many grants, and so much money.  I remember the birth of that idea in the Office of the Attorney General under Mark Earley, Randolph Beales, Jerry Kilgore and then Judith W. Jadgmann – three of them with rural roots.  I signed for the first electronic transfer of tobacco settlement funds and the number of zeros made me woozy.

“Arguably, with some exceptions, such as Danville, the rural region of Southside and Southwest Virginia is in worse shape today than 20 years ago when the Tobacco Commission had more than $2 billion to “transform” the region as the legislation required. Look at the educational attainment levels,” Baliles said in his recent speech to the State Council of Higher Education for Virginia (SCHEV). Again, spot on.

Baliles’ idea to focus remaining tobacco settlement funds on educational attainment is a good one, but he also has his eyes on the burst of higher state tax revenue that will result when Virginia conforms to recent federal tax changes.  Never has so little money been earmarked by so many people for so many pet projects:  the earned income tax credit are K-12 school construction and reconstruction top a growing list. (More on that tomorrow.)

Rural Virginia, designated by that rough U-shaped ring of relative poverty around the corridors of wealth, has educational assets.  Baliles notes that 14 of the 23 community colleges are located there, but they are the smaller ones. Their doors are not battered by more applicants then they can handle, in most cases.  Virginia Tech, Radford and Longwood are state universities in the footprint, and the powerful New River Valley economy is fueled by the first two.

The problem is that young people get what education they do and then leave for the bright lights and the land of Uber.  Or they leave to get that next level of education.  For any number of reasons, once they have the opportunity they simply do not  stay in sufficient numbers to become a magnet for high tech or advanced manufacturing jobs in great numbers.  Many who stay lack that educational attainment and the opportunity it brings.

I cannot think of any policy, any economic development strategy, any spending plan coming out of the General Assembly that will change this pattern.

BVG Makes Case for Virginia as Offshore Wind Supply-Chain Hub

Manufacturing job-creation potential for the offshore wind industry. Source: BVG.

Virginia is very well positioned to establish a supply-chain hub for an East Coast wind-power industry, says a report written by offshore-wind consulting firm BVG Associates and underwritten by the Virginia chapter of the Sierra Club.

Although Virginia will not participate in the “first wave” of  East Coast offshore wind projects, which is ramping up now in northern coastal states, Virginia-based businesses could supply key components to those pioneering efforts if the Commonwealth acts quickly, concludes the newly published report, “Offshore Wind in Virginia: a Vision.”

The report lays out the following scenario for wind farm-driven economic development:

Virginia will derive immediate economic benefits while maturing its offshore wind supply chain, ensure development of its own 2 GW [gigawatt] offshore wind by 2028, and provide the tipping point for a second wave of lower-cost projects off Dominion Energy’s service territories, notably the Kitty Hawk lease area in North Carolina.

The study should be read with the understanding that Sierra Club-Virginia is promoting Virginia offshore wind generation to advance its long-term goal of eliminating fossil fuels and nuclear power from Virginia’s energy mix. Even with that caveat in mind, the study provides the most detailed analysis yet published of how Virginia can leverage offshore wind into a major economic-development boon for the Hampton Roads maritime sector. The Northam administration has hired a BVG associate to help the state fashion a strategy to build an offshore wind supply chain.

According to the report, Virginia has five big competitive advantages:

  • An industrial coastal infrastructure, with large areas for laydown and storage, quayside length for load-out, and direct access to the open ocean with unlimited vertical clearance.
  • A large workforce with competitive pay scales and experience in shipbuilding, ship repair, ports, logistics, and vessel operation.
  • Highway, rail, and inland waterway connections linking Virginia’s ports to industrial centers throughout the Southeast, Mid-Atlantic, and Midwest.
  • Eastern population centers with high and growing electricity demand, particularly for the Internet economy. Northern Virginia has a large and growing data-center corridor, and two new data centers are being built in Virginia Beach.
  • High-voltage interconnection capability in Virginia Beach sufficient to handle the anticipated commercial wind-lease area after “moderate investment.”

The first two advantages make Hampton Roads an attractive location for the fabrication and assembly of jacket foundations and offshore substation platforms. Two sites in the region could be made ready for a steel fabricator within 20 to 29 months at a cost of $5 million to $15 million. Jacket and substation production could create more than 2,000 new direct and indirect jobs.

The first phase of offshore wind production will be expensive. Wind supply chains in Europe like to see an annual market of at least 1 gigawatt, the equivalent of 80 to 125 turbine nacelles, turbine towers, blades, or foundations. A factory owner would look to produce 200 kilometers of cable per year, a volume needed to apply lean manufacturing strategies. Lacking U.S.-based investment, first movers in offshore wind would have to pay premium prices. Another complication is the Jones Act, which prohibits European-built and based vessels from transporting components between U.S. harbors. Offshore wind-service companies cannot yet justify building state-of-the-art jack-up vessels in the U.S. in compliance with the Jones Act.

First-mover states — Massachusetts, Rhode Island, Connecticut, New York, New Jersey, and Maryland — have committed to build more than 3 gigawatts of offshore capacity. Virginia has committed to build 5 gigawatts of renewable energy, including a substantial component from wind, by 2028. Dominion Energy has proposed to build two turbines with experimental designs to ensure that a larger wind farm could stand up to hurricane conditions frequently experienced in the Mid-Atlantic.

Writes BVG:

By the middle of the next decade, Virginia could be a leading U.S. market for offshore wind, driven by the ability to benefit from the lessons learned from northeast coast states and the maturing U.S. supply chain, complemented by Virginia’s strong infrastructure, location benefits, and deployment of offshore wind at scale.

Suppliers to the wind industry, such as turbine, foundation and cable manufacturers, like to see a regular run-rate for installed capacity. This allows easier investment planning and more efficient facilities. Manufacturers also need projects of a certain size to achieve economies of scale. … The Virginia market in our scenario is … not big enough by itself to attract investment, so the Atlantic Coast market as a whole is crucial. In our scenario, Virginia provides the tipping point, creating the demand needed to support an investment decision.

Some infrastructure investment in Hampton Roads may be necessary. Given the inevitable time lags in gaining regulatory approvals, BVG says, Virginia needs to act quickly. Portsmouth Marine Terminal would need between $11 million and $25 million to upgrade the port for major offshore use, with “additional costs in the facilities themselves.”

The report provides no estimate of how much it would cost to upgrade Virginia’s electric grid to accommodate a massive supply of offshore wind, nor, beyond general statements that wind power is complementary with solar power, does it discuss the impact of intermittent wind power on reliability. Fossil fuel advocates argue that wind and solar provide no surge capacity in extreme, polar vortex-like weather events.

The BVG study make no policy recommendations. It cedes that task to the Department of Mines, Minerals and Energy, which is developing a strategic plant to identify supply-chain businesses and how to market Virginia as a hub for the industry.

Will Virginia Legalize Recreational Marijuana Use?

High times today.  The marijuana legalization wave is beginning to wash over North America. Nine states (WA, OR, CA, NV, CO, MA, VT, ME and AK) along with the District of Columbia have legalized the recreational use of marijuana.  Well over 20% of Americans now live in states which have legalized recreational marijuana use. On Oct 17 of this year recreational marijuana use will be legalized across Canada. While the various provinces will regulate the sale and use of marijuana in their own unique ways, it will be legal across Canada.

Higher times to come. Several more states are slated to decide the question of legalized recreational marijuana use this November (or sooner)…

Michigan – Voter initiated measure to permit those over 21 to grow and possess personal use quantities of cannabis and related concentrates.  Statewide polling data from this spring shows 61% of voters intend to vote “yes” on the measure. While you may not be able to drink the water in Flint it looks like you’ll be legally able to use it in a bong come this November.

New Jersey – The New Jersey legislature is debating bills that would legalize recreational marijuana in the Garden State. Interestingly, some of these bills would also expunge the criminal records of anybody convicted in the past of marijuana-related crimes. Was I ever arrested for weed?  Fuhghetaboutit!

North Dakota – A voter – initiated referendum will appear on North Dakota ballots this November. Uniquely, the North Dakota initiative would set no limits on the amount of marijuana people can possess or cultivate. Perhaps a large stockpile is required to get through those long, dark winters.

New York – A recent state commissioned study on recreational marijuana legalization came out strongly in favor of making ganja legal. Gov Andrew Cuomo quickly sprang to action setting up a working group to write a marijuana legalization bill. Put New York in the “when, not if” column.  This should give new meaning to Billy Joel’s song “New York State of Mind” (which has the opening line, “Take a holiday from the neighborhood”).

Oklahoma – This June Oklahoma voters approved a broad medical marijuana usage law. Activists have collected a lot of signatures to get the question of legalized recreational marijuana on the Nov 6 ballot. Whether there are enough signatures or enough time to get the ballot question approved this year remains to be seen. Sadly, Merle Haggard died in 2016 before being able to revise the first line of his famous song Okie from Muskogee … “We don’t smoke marijuana in Muskogee”.  It seems that sooner, rather than later, people will be openly smoking marijuana in Muskogee.

Delaware – In June, a majority of House lawmakers voted in favor of legislation to legalize marijuana use and retail sales. However, because the legislation imposed new taxes and fees, state rules required it to receive super-majority support. Lawmakers are anticipated to take up similar legislation again next year. I’ll predict that by 2020 people will be legally getting small in the Small Wonder.

A spot of hemp, Mr. Jefferson? Five of the first six presidents of the U.S. were Virginians and there is evidence that all five of them smoked a little hootch from time to time. You can read the evidence from an unimpeachable source … High Times …  here.

Will River City go up in smoke? But what of modern Virginians and Virginia politicians? In a 2017 Quinnipiac poll Virginia voters supported allowing adults to legally posses and use small amounts of marijuana by 59 – 35 percent. So, the voters would like to see marijuana legalized in Virginia. But since when did the voters matter to Virginia’s political elite? They don’t listen to voters, they listen to dollars. The Virginia Public Access Project tallies up the following donation totals for “all years”:

Beverages – Alcohol Distributors / Brokers – $20,885,384
Retail Sales – General $10,113,070
Restaurants – $6,533,357
Beverages – Alcohol Manufacturers – $3,993,418

As point of reference, Dominion Energy donated $11,354,842 during the same period.  Meanwhile, PepsiCo, owner of Frito-Lay – the maker of Cheetos – only donated $82,385.

— Don Rippert

Bacon Bits: In with the New, Out with the Old

In with the new…

Data Center Alley too hot to handle. The Metropolitan Washington Airports Authority (MWAA) has sold 424 acres west of Dulles International Airport to data-center developer Digital Realty Trust for an eye-popping $236.5 million — $558,000 per acre. MWAA will place $207 million in a segregated account used to reduce costs that airlines pay to do business at the airport. The transaction expands the large and growing data-center presence of Digital Realty in Loudoun County, reports the Washington Business Journal.

Virginia’s next big solar project? Solar developer Community Energy has applied to build 125-megawatts in solar capacity in Augusta County, reports PV magazine. To offset concerns about neighborhood impact, Community Energy plans to surround the facility with a buffer of vegetation and put into place measures to diminish the limited audio output. Instead of purchasing the land, the power company is leasing it from landowners, providing farmers an ongoing revenue stream rather than a lump-sum payment.

Out with the old..

Gutted newsrooms. Ned Oliver with the Virginia Mercury has quantified the shrinkage of news staff at Virginia’s largest daily newspapers in recent years. After quietly laying off another eight newspaper employees at the beginning of the month, the Richmond Times-Dispatch newsroom has gone from 42 news and sports reporters in 2010 to 26 today, from nine to six photographers, and from 20 to 13 editors. The Virginian-Pilot has dropped from 67 reporters to 33, 35 editors from to 22, and eight photographers to five. Newsroom staff at the Roanoke Times has eroded by 35% to 25 reporters, 11 editors, and three photographers.

“Meanwhile,” writes Oliver, “there is still no clear model for metro and community newspapers to make up for the loss of all that ad money to digital giants like Google and Facebook.”

Tarheel coal ash overflow. In an event sure to impact the debate over coal ash in Virginia, heavy rains from Hurricane Florence eroded a coal ash facility at a Duke Energy power plant near Wilmington, N.C. The utility is investigating the possible release of about 2,000 cubic yards of the material — enough to fill two-thirds of an Olympic-size swimming pool, according to the Herald-Sun. It was not clear whether any of the ash, which contains traces of heavy metals, reached public waterways.

The release reinforces the necessity of removing coal ash from unlined, uncapped containment ponds where electric utilities have been restoring the coal-combustion residue for decades. Environmental Protection Agency regulations were designed to prevent incidents like this by consolidating and capping coal ash ponds. While environmentalists, regulators and utilities haggle over whether it’s better to store the material in lined landfills, a process that could take two to three decades, existing containment ponds remain vulnerable to extreme weather events like Florence.

More Details on the Micron Deal

Yesterday I tallied up the incentives offered Micron Technologies to invest $3 billion in an expansion of its Manassas Semiconductor plant based upon information released by Governor Ralph Northam’s office and the Virginia Economic Development Partnership (VEDP). Today, thanks to reporting by the Washington Business Journal, we have a few details on what the City of Manassas chipped in.

Manassas did its part by agreeing to waive some permit fees and allowing the company to use third-party reviewers and inspectors. That, in turn, will allow Micron to save several million dollars and have greater control over the timing of permit approvals. The city also agreed to adjust its tax rate for semiconductor equipment each year so that Micron will benefit from gradual increases to its current bill in the next decade.

That last sentence looks like Manassas will create a special schedule for its Machine & Tools tax. Without the provision, Micron’s tax bill for manufacturing equipment would take a huge jump when the expansion goes live. The implication here is that Manassas will allow the higher tax bill to phase in over time.

According to the city website, the normal M&T tax rate is $2.10 of assessed value. A special tax rate for semiconductor manufacturing is $0.656 per $100 of assessed value. Let’s say for purposes of illustration that $2 billion of Micron’s $3 billion investment will consist of semiconductor manufacturing equipment taxable under the city’s current code at the rate of $0.656 per $100 of assessed value. That would imply an annual tax bill of $13.1 million.

That’s a lot of money for a city of 43,000 residents. It is understandable that city officials would be willing to give up some of the windfall — how much, we don’t know yet — in order to make the deal happen.

Stephen Moret, CEO of the VEDP, told the WBJ that Virginia is competing in a global economy in which giant incentive packages for projects like Micron’s is the norm.

There are other places around the world that regularly give facilities like this $500 million incentive packages,” Moret said. “Part of our challenge in Virginia is we’re normally not a significant incentives state. And certainly, we didn’t match what New York has done before, what Singapore has done before. But we knew we had to be competitive, so we worked together with the state and local partners to put forward the best package that we could and responsibly support.

Let’s See a Proper Accounting of the Micron Incentives, Please

Photo credit: Inside NoVa

Let’s get down to the bottom line on Governor Ralph Northam’s big Micron Technology Inc. announcement: What does Virginia get out of the deal, and how much will it cost the public?

The answer: Not enough information has been made available to tell.

Boise, Idaho-based Micron will invest $3 billion to increase memory production at its Manassas operation, creating 1,100 jobs by 2030, according to the press release issued by the governor’s office. In exchange, Virginia is ladling out one of the biggest incentive packages in the modern-day history of economic development.

Here are the economic benefits mentioned by the Northam administration:

  • The expansion will position the Manassas plant as Micron’s “Center of Excellence” for long-lifecycle memory and “cement the company’s position as one of Virginia’s largest exporters.” The project is expected to increase exports from the Commonwealth by more than $1 billion annually.
  • Micron will establish a global R&D center in Manassas for memory storage solutions focused on automotive, industrial and networking markets. The research center and related activities will employ about 100 product engineers.
  • Micron’s philanthropic arm will donate $1 million toward “growing the next generation of scientists, engineers and technicians” at “several” Virginia universities and community colleges.

Micron is a heavy hitter in advanced technology, and it is playing for the long term. The $3 billion investment represents a long-term corporate commitment. Micron will not operate its plant for 10 years until plant and equipment are depreciated and then pick up stakes and move somewhere else. Though not emphasized by the press release, the Micron investment could have ripple effects if suppliers locate nearby or if its research contributes to growth of a Northern Virginia innovation ecosystem for such sectors as, say, unmanned systems or the Internet of Things.

Although Micron has deep roots in Virginia, the company considered other locations around the world — and it played hardball with the state, extracting a massive incentive package. How much will this cost taxpayers and electricity rate payers?

Well, we don’t fully know yet. Micron will be eligible to receive a Major Employment and Investment (MEI) Project Approval Commission grant of $70 million for site preparation and facility costs, subject to approval by the General Assembly. But that’s just for starters. “Additionally,” says the press release, “the City of Manassas and utility partners are providing a broader, comprehensive support package to enable the expansion, including substantial infrastructure upgrades and additional incentives.” The press release provided no numbers for the “support package.”

Most of the state support will be up-front money. The Commonwealth will contribute $50 million in a year and $20 million in two years, contingent upon the company meeting its commitments along the way. Micron will create an escrow account to ensure that the state will be made whole in case the company doesn’t deliver, Stephen Moret, CEO of the Virginia Economic Development Partnership, told the Richmond Times-Dispatch.

The governor has not yet released the details on incentives offered by the City of Manassas or Dominion Energy for up-front infrastructure improvements. At some point that information will be made public — in the 2019 General Assembly session, if not before. We can assume that the Northam administration will present costs and benefits in the most favorable possible light.

Time value of money. One trick to watch out for: failing to account for the time value of money. A core principle of economics and finance is that a dollar in hand today is worth more than a dollar a year from now, and a whole lot more than a dollar 11 years from now. A 2018 dollar generating a return on investment over 11 years could easily double in value by 2030, depending upon the rate of return assumed. (The Virginia Retirement System assumes a 7% annual rate of return on invested capital.) 

Virginia, Manassas and Dominion will pay for up-front infrastructure improvements in 2019 and 2020 dollars. Micron won’t complete its expansion until 2030. Undoubtedly some of the company’s expenditures will come early in the process, but some will come later. The economic value to Virginia could vary significantly, depending upon Micron’s schedule for investing capital and creating jobs. In any honest accounting, legislative numbers crunchers need to take the time value of money into account.

Sales tax giveaways? Will a break on the state sales tax be part of the package? In an interview with Bacon’s Rebellion a day before the Micron news broke, Secretary of Finance Aubrey Layne alluded to the erosion of revenue gains from the state sales tax due to corporate expansion and relocation incentives. Such giveaways have become routine in corporate incentive packages, he said. Although he made no specific allusion to Micron, as Steve Haner notes in the previous post, it seems clear in retrospect that he was thinking about the semiconductor giant.

Net benefit. One other factor to consider in toting up the costs and benefits: Examine net tax benefits. Undoubtedly, we will hear about the millions of dollars in revenues from the corporate income tax, personal income tax, sales tax, personal property tax, BPOL tax, and machine-and-tools taxes generated by Micron, not to mention the “multiplier effect” of Micron-related spending in the local economy. Given the incredibly capital-intensive nature of Micron’s investment, the project could represent a huge tax boon to Manassas and the state — if they don’t give it all back through tax breaks.

The critical point to remember is that the taxes generated by Micron and its expected 1,100 additional employees come with a liability — the commitment to provide road improvements, schools, and other public services. Northern Virginia roads are already insufferably congested. Northern Virginia localities operate the most expensive school systems in the state. How much will Manassas, its neighbors and the state incur in liabilities from the addition of 1,100 workers and their families, many of whom will be migrating to NoVa from outside the region? No accounting of costs and benefits is complete without those numbers.