A “Trillion-Dollar Blunder” in the Making

A year ago, I wrote a blog entitled, The Big Business Story to Come, about the incoming Trump administration’s plan to cut corporate taxes in a drastic manner to spur economic growth. At the time, I thought it was a dandy idea.

Celebrated by Republicans and scourged by Democrats, a bill that drops the corporate tax rate from 35 percent to 21 percent, is now expected to be voted on and passed this week.

But I’m not so sure this legislation is the cure-all that it is being billed as. Indeed, it may come back to bite us. Just last month, business leaders attending the Wall Street Journal CEO Council were asked for a show of hands if they planned to increase capital spending in the coming year should corporate tax cuts become a reality.

Few responded, prompting President Trump’s top economic adviser, Gary Cohn, to ask, “Why aren’t the other hands up?”

A surprising number of chief executives have said they will use the extra cash to pay shareholders more, and not grow jobs and wages.

No Talk of Tax Cuts

A little more than a week ago, I attended a conference in New Orleans, bringing corporate site selection consultants, like myself, together with economic developers from around the country. The purpose of Economix 2017 was both educational and networking.

Curiously, there was virtually no talk of massive tax cuts for businesses and how that might affect the economic outlook for communities. Now granted, the final details of the Republican Party’s plan were only hammered out on Friday, but the fact that there was little or no discussion about it had me puzzled.

After all, wasn’t this tax plan going to have broad ramifications on us all? Wasn’t it ostensibly designed to spark more corporate investment, more jobs, and higher pay?

For my part, during short, revolving small group sessions, I told economic developers that cutting the corporate tax rate from 35 percent to 21 percent will make the United States a more attractive place for new business ventures, will stimulate investment and create American jobs.

Most of the economic developers nodded in agreement, and I puffed up like a damned blowfish.

Apparently Not

Soon after I returned home from the conference, the Institute for Supply Management, came out with its semi-annual forecast indicating that capital investment and hiring would grow at a slower pace in 2018.

What’s more, only a small share of the factory purchasing managers surveyed said the proposed tax cuts would be driving their capital-spending decisions.

In hindsight, the ISM forecast was in line with what another consultant told me across the dinner table on my last night at Economix, an event sponsored by my friends at Consultant Connect. This particular consultant, who primarily works with European manufacturers, said a lowering of the U.S. corporate tax rate would mean very little to most of his clients.

In response, I think I said something very deep. “Really?”

I’m All Wet

So let us recap. Though far from being scientific surveys, it would appear that CEOs and factory purchasing managers are saying that a dramatic tax rehaul, the biggest since 1986, will have little impact on capital spending.

Furthermore, the subject of tax cuts were are largely ignored at a conference that I attended of corporate site selection consultants and economic developers. And a fellow consultant said his clients could really care less about the federal corporate tax rate.

Now if I am being totally objective, this would indicate that I might be all wet by holding onto the common belief that reducing marginal tax rates will spur economic growth.

To further my self-humiliation, I have learned that the Bureau of Labor Statistics has collected 25 years of data showing that high income earners spend much less for every tax dollar saved, than low income earners — 86 cents versus 48 cents respectively.

And a study by the Congressional Research Service showed that economic growth over a 65-year span was largely unaffected by how much tax the wealthy pay. Indeed, growth is more likely if lower income earners get a tax cut.

Now that was something to ponder right there. And I did so over a glass of bourbon.

Compared to the Rest of the World

There has been this long-running assumption, certainly I have subscribed to it, that our corporate tax rate of 35 percent has been unreasonably high in comparison to the rest of the world and that doesn’t even include state taxes. Faced with that prospect, companies have been compelled to invest in facilities and jobs in offshore locations with lower taxes.

The United States has the third highest corporate income tax rate in the world, exceeded only by the United Arab Emirates and Puerto Rico, according to the nonpartisan Tax Foundation. We also have the highest corporate income tax rate among the 35 industrialized nations of the Organization for Economic Co-operation and Development (OECD).

“The U.S. tax rate is 16.4 percentage points higher than the worldwide average of 22.5 percent and a little more than 9 percentage points higher than the worldwide GDP-weighted average of 29.5 percent. Over the past ten years, the average worldwide tax rate has been declining, pushing the United States farther from the norm,” according to a Tax Foundation report in August 2016.

Loopholes and Deductions

Clearly, it would seem that the U.S. is out of kilter with the rest of the world. However, the real kicker here is the amount actually paid in taxes relative to taxable income. It varies wildly because of an abundance of loopholes and deductions.

A U.S. Government Accountability Office found in a 2016 study that among large corporations that met that $10 million in assets threshold, 42.3 percent paid no federal income taxes after tax credits in 2012. Among profitable large companies, 19.5 percent paid no federal income taxes. The average effective tax rate among the profitable large corporations was 16.1 percent.

That might be worthy of another glass.

Flush With Cash

Probably the reason why so few CEOs raised their hands at the Wall Street Journalmeeting when asked if lower rates would indeed result in more investment, is that corporations really don’t need the money. In fact, they are flush with cash, sitting on nearly $2.3 trillion of cash reserves, double of what it was in 2001.

Which begs the question (or the answer) as to why they aren’t spending more of their liquid assets on capital improvements, such as building more new factories around the country.

“CEOs aren’t waiting on a tax cut to ‘jump-start the economy’ — a favorite phrase of politicians who have never run a company — or to hand out raises,” wrote former New York Mayor and billionaire chief executive Michael Bloomberg in an op-ed piece. “It’s pure fantasy to think that the tax bill will lead to significantly higher wages and growth, as Republicans have promised.”

A Core Belief

Cutting taxes has been a core belief of the Republican party since Ronald Reagan. The thinking goes that giving corporations and most Americans tax cuts will result in them spending their tax savings on buying stuff and hiring more workers, which generates more economic growth, more jobs, and incomes to rise.

This theory, which I have long subscribed to, has been derisively called “trickle-down economics.” The phrase originates with American humorist Will Rogers, who mocked President Herbert Hoover’s Depression-era recovery efforts, saying that “money was all appropriated for the top in the hopes it would trickle down to the needy.”

Never mind the aforementioned studies by Bureau of Labor Statistics and the Congressional Research Service, if Rogers, who once quipped, “I am not a member of any organized party – I am a Democrat,” were around today, he would have plenty of material to work with. The bill will likely not garner a single Democratic vote.

With the passage of the bill, most impartial observers agree the gap between the haves and have-nots is likely to grow. And while most middle-class families will get sizable benefits (at least until the tax cuts for individuals expire in 2025), they are unlikely to see nearly as large of a benefit as the top.

Makes Problems Worse

Declaring the Republican bill a “trillion-dollar blunder,” Bloomberg says it does nothing to address the nation’s biggest economic problems.

“The largest economic challenges we face include a skills crisis that our public schools are not addressing, crumbling infrastructure that imperils our global competitiveness, wage stagnation coupled with growing wealth inequality, and rising deficits that will worsen as more baby boomers retire.”

Bloomberg says the tax bill makes each of these problems worse, achieving four main things:

1. It takes money away from schools and students.
2. It restricts our ability to invest in infrastructure.
3. It does nothing to boost real wages while making health insurance more expensive.
4. It makes it harder to control the costs of Medicare and Social Security without cutting defense and other spending — or further exploding the deficit.

It would probably take me four additional blogs to explore each of those points in detail to determine if Bloomberg is right. But if he is, and I suspect that he is, those aren’t much in the way of achievements. Nevermind this bill adds $1 trillion to $1.5 trillion to a $20 trillion deficit. Where are the deficit hawks in the GOP?

Could we see an uptick of corporate investment with lower rates? Probably so, but who will benefit and at what cost? I’m not so sure we are going to like the answers when it’s all said and done.

I’ll see you down the road.

Dean Barber is principal of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. Mr. Barber is available as a keynote speaker and can be reached at dbarber@barberadvisors.com or at 972-890-3733.

Innovation Districts: More Cities Try Their Hand

Economists tell us that productivity growth in the United States has declined sharply since 2004, all the while advances in digital technology have been growing. Now if that is not a head scratcher, I don’t know what is.

These same economists have various explanations for declining productivity growth but there is no consensus, leaving policy makers and supposed economic development gurus like me in a bit of a lurch.

This much we know and can agree upon — our economy depends on productivity improvements for long-term economic growth, and innovation is the fuel to the engine.

For companies, innovation means staying abreast of the digitalization of everything and investing in new technologies that give them a competitive advantage.

For communities, innovation means advancing the skill levels of its people, investing in physical infrastructure (roads, pipe, broadband data transmission) and, yes, betting on and helping young companies that have great potential to grow.

I have to think that innovation makes for damn good economic development. Now the question is how do you bottle and sell that.

A Neighborhood Approach

One strategy being propagated and pushed by the Brookings Institution is that of “innovation districts.” The word “district” implies a small defined geographic area, like a neighborhood.

And that’s precisely what we’re talking about, areas within cities where research universities, medical institutions, and companies cluster and connect with start-ups, accelerators, and incubators.

In a May 2014 paper entitled, “The Rise of Innovation Districts: A New Geography of Innovation in America,” Bruce Katz and Julie Wagner with Brookings wrote:

“In recent years, a rising number of innovative firms and talented workers are choosing to congregate and co-locate in compact, amenity-rich enclaves in the cores of central cities. Rather than building on green-field sites, marquee companies in knowledge-intensive sectors are locating key facilities close to other firms, research labs, and universities so that they can share ideas and practice “open innovation.”

“Instead of inventing on their own in real or metaphorical garages, an array of entrepreneurs are starting their companies in collaborative spaces, where they can mingle with other entrepreneurs and have efficient access to everything from legal advice to sophisticated lab equipment. Rather than submitting to long commutes and daily congestion, a growing share of metropolitan residents are choosing to work and live in places that are walkable, bike-able, and connected by transit and technology.”

Katz and Wagner are speaking to shifting market and demographic dynamics and a reevaluation of the natural strengths of cities, namely proximity, density, walkability, and livability.

Now this won’t work everywhere. It probably only works in urban settings in cities of some size. Essentially, this is clustering but with a new urban twist to essentially attract young people and young companies to create an ecosystem.

Having the Anchor Institutions

Recently, I have spent time in Oklahoma City and Birmingham, Ala., two communities that Brookings says have all the makings for an innovation district. In both cities, there are medical academic centers – the Oklahoma Health Center and the University of Birmingham at Birmingham.

Brookings says these two cities can build an innovation district by connecting their leading-edge anchor institutions to companies, particularly start-ups, in a physically compact, transit-accessible, and technically-wired mixed use area offering housing, office, and retail.

This means remaking the physical landscape, which will be no easy task. Both OHC and UAB have a traditional campus look and feel to them. While their health care institutions are fairly close to one another, they have spread-out physical layouts that are car centric, which hinders people walking to gathering spaces to exchange ideas and build collaborative networks.

So there is a design element that has to be overcome to increase density by bringing in housing, office and retail. The elements are there in Birmingham and OKC, but a lot of planning and execution has to happen if an innovation district, as envisioned by Brookings, is going to become a reality in either city.

So what are the odds? Hell, I don’t know. (How many times have you heard a consultant say that?) I see things in both cities that indicate that they could pull it off. Of course, it will take political will and lots of money being spent for it to happen.

OKC Has MAPS

In Oklahoma City, there is a history of the electorate giving city government the green light to make transformative change. The latest of example of that occurred in September when voters authorized elected leaders to raise and spend an estimated $1.5 billion over the next decade on municipal needs.

The vote provides for a 27-month extension of a 1-cent MAPS sales tax, for street resurfacing and related improvements.

After being told by United Airlines in 1992 that is was in essence an ugly town unworthy of investment, then-Mayor Ron Norick proposed the Metropolitan Area Projects (MAPS) initiative in 1993.

The program featured defined capital projects that would be funded by a penny sales tax. The tax would have a start date and an end date and the projects would be paid for in cash, without incurring debt.

Bricktown, Whitewater and Streetcars

In 1993, the first MAPS vote proposed the construction of a 20,000-seat, indoor sports arena; construction of a 15,000-seat downtown ballpark; construction of a new downtown library; construction of the Bricktown Canal; development of a trolley transit system; development along the North Canadian River; and renovations to the Civic Center Music Hall, Cox Convention Center and Oklahoma State Fairgrounds.

MAPS 2 was approved by voters in 2001. Dubbed “MAPS for Kids,” the $700-million initiative included more than 100 Oklahoma City-area school projects, which included new school construction, extensive renovation to existing schools, technology upgrades, and other improvements.

In 2009, OKC voters approved MAPS 3, an ambitious $777-million plan that continues to change the face of downtown Oklahoma City. MAPS 3 features a 70-acre central park linking the core of downtown with the Oklahoma River; a modern streetcar system; a new convention center; miles of new sidewalks and hike-and-bike trails; river improvements, including a public whitewater kayaking facility; senior health and wellness centers throughout the city; and improvements to the State Fair Park public buildings, meeting halls and exhibit spaces.

All this is happening in Oklahoma City because the vision is there to make things happen, and the voters see the wisdom of that vision.

Can an innovation district happen in OKC? Based on history of making things happen, I would give it a pretty good shot.

Railroad Park, Beer and NIH Funding

Now let’s look at Birmingham, a city that I lived in for more than 20 years. When I left Birmingham in 2007, I thought the city was going nowhere. Since I’ve been gone, great things have happened. (I reject the idea that there is a correlation between the two.)

Railroad Park, a 19-acre green space in downtown Birmingham that celebrates the city’s industrial and artistic heritage, opened in the fall of 2010. In April of 2013, the Birmingham Barons Baseball Club played their first game in their new ballpark, Regions Field. The state-of-the-art 8,500 seat facility in the heart of downtown.

Avondale, what used to be a neighborhood on the skids, is now a hipster haven, featuring cool bars and restaurants and a craft brewery.

Birmingham now has Good People Brewing, Avondale Brewing, Cahaba Brewing, Trim Tab Brewing, Red Hills Brewing, and Ghost Train Brewing, all very good indicators that this is a very civilized place.

More importantly, UAB ranked 25th nationally in 2016 funding from the National Institutes of Health, which is essentially the federal government’s medical research agency. Grants to UAB’s six health- and medical-related schools totaled more than $238 million last year.

Tailor-Made for the 21st Century

Adding to the picture, you have Innovate Birmingham, a $6 million federal grant program to train people for innovation jobs. The program will be administered in the UAB Innovation Lab (UAB iLab) at Innovation Depot, a business incubator that’s home to more than 100 startups. Innovation Depot will connect participants in the program with its tenants and other partner businesses.

Katz said Birmingham has “got the geography that essentially is tailor-made for the 21st century,” in an interview last year with Alabama NewsCenter.

“Proximity, density, vitality, authenticity and you’re beginning to see entrepreneurial startups, scale-ups either off of research from the universities or people just want to be here,” Katz said.

Can an innovation district happen in Birmingham? There is not the voter-approved MAPs tradition as there is in Oklahoma City, but pieces are falling into place, and Birmingham has surprised me as a much-improved city that is very livable.

Of course, I am an aficionado of craft beer, and my views may be colored by that. But it’s a quality of life measure that doesn’t hurt any place. Indeed, I believe craft beer only enhances it.

Real or Hype?

Innovation districts are still an early trend if they are a trend at all. There has yet to be a systematic analysis to prove whether districts characterized by a diversity of institutions, companies, and start-ups can live up to the hype.

That hasn’t stopped a slew of cities from jumping on the innovation district bandwagon. They include Cambridge, Philadelphia, St. Louis, Detroit, Seattle, Boston, and Raleigh-Durham, among others.

The potential for innovative growth appears real, even if most of it is organic rather than planned. One thing is certain. We need ideas, whether they are hatched in universities, startups or mature companies. We need innovation to keep going and growing.

And, of course, we need more craft beer. That’s a given.

I’ll see you down the road.

Dean Barber is the president/CEO of Barber Business Advisors, LLC, a location advisory and economic development consulting firm based in Dallas. BBA helps companies and communities. (Send us your RFPs.) Mr. Barber is available as a keynotes speaker and can be reached at dbarber@barberadvisors.com or at 972-890-3733.