In the first post in this series I argued that we need an economic development strategy that no only creates middle and upper incomes jobs for educated workers but that leads to a rebirth of troubled communities.
In this post I want to point out some of the key differences between what I will call a community based economic development strategy and a tax cutting economic development strategy.
Tax Cutting vs Community Development Paths to Economic Renewal
The key difference between the two strategies is that the tax cutting strategy thinks of economic development in an individualistic manner. It thinks that what we need to create economic growth is to give businesses the individual incentives, in the form of tax reductions, they need to justify moving into Philadelphia.
A community based economic development strategy is much more holistic. It recognizes that the factors that encourage businesses to locate in one community or another have much more to do with the common goods in these communities than with individual benefits companies receive.
To see this, let’s start with a run-down commercial corridor—say Manyunk twenty years ago or Mt. Airy ten years ago. What does it take to revive these commercial districts, to get new stores to open or move to the area?
What Retail Businesses Need: Shoppers and other Amenities
Retail businesses need shoppers. But shoppers typically don’t go to one store and then go home. They go to a number of stores and, often, want to visit a number of stores selling the same kind of goods so that they can compare prices and quality. If you followed the individualist logic, you would think that retail stores would try to be the only one of their kind in a neighborhood. But there wouldn’t be four or five furniture stores in Manayunk today or a phenomenon such as Jeweler’s row, if that individualist logic held true.
Retail shoppers typically also want to do more than shop. They often want a place to have a snack or lunch and dinner. They often want a nearby park or recreation center where they and their children can take a break from shopping. And, quite often, they also want some entertainment options after dinner.
So retail shoppers are drawn not so much to individual stores with low prices but to shopping districts with a variety of retail stores and nearby opportunities for eating, recreation and entertainment. And, of course, there are other factors that influence which commercial corridor gets their business. Most people would prefer to shop in a commercial corridor that is physically attractive and clean. They prefer commercial corridors that are easy to get to by public transit or at which there is plenty of parking. And they certainly prefer commercial corridors that are safe from crime.
Retail businesses have other reasons, besides the availability of shoppers, to locate in strong commercial corridors. They also want to locate in a place where they have a number of potential employees from which to choose. Those places are more likely to be strong commercial corridors which employees find accessible and where, given the other shops and amenities, they like to work.
The Limited Importance of Tax Rates to Economic Development
So retail business development is not just a matter of giving businesses low taxes. Indeed, if the costs of doing business—such as the costs of taxation—were the only factor that influenced the decisions of businessmen, they would always seek to locate in weak commercial corridors where rents are low. But, as we know, they don’t. Good retail businesses typically prefer thriving—and expensive—commercial corridors to those that which are sick and inexpensive.
Thus it should be no surprise that public policy that does little more than try to reduce the costs of doing business by reducing taxes will not be able to create or revive commercial areas. All the Keystone Opportunity Zones in the city with little or no development prove the point. These zones allow businesses to operate without paying most business taxes. Yet they do not provide the conditions for creating or reviving commerce. And if tax reductions targeted at particular neighborhoods cannot revive commercial districts, a city wide policy of tax reductions won’t work either. If we reduce taxes city-wide, there will obviously be no incentive for businesses to relocated into declining commercial areas. Of course, a city wide tax reduction might help a bit to shift businesses retail businesses from thriving commercial districts in the suburbs to those in the city and this would be a good thing. But taxes are such a small proportion of the costs of doing business that the effects are likely to be small especially in the absence of other public policies that make new areas of the city attractive to businesses.
In part III, I talk about how community based economic development strategies can lead to the renewal of depressed commercial areas.