Once upon a time, in a land where we now live, citizens sought to improve their communities through something called “economic development.” They formed committees of local business and government leaders to encourage transportation and other public works improvements, the attraction of new industries, and the expansion of existing firms.
The primary motive behind these efforts was to build the property tax base of the community so the services provided by the schools, the libraries, the cities and towns, as well as the county could be enhanced. At that long ago time, these services were financed through the local property tax.
As the town grew in population and provided more revenue for local businesses, it meant more students for the schools and more law enforcement. If more businesses were in town with more jobs, there would be more stress on the fire department and the streets would have to be kept in good condition.
All this takes money derived from the property tax. Growing and modernizing businesses would have larger facilities and more expensive equipment that could be taxed. Higher paying jobs would lead to higher rents and selling prices for houses; more people with more money in their pockets make the land and buildings of homes, stores and offices more valuable.
In that bygone time, economic development (ED) was easily understood as real estate development. The measure of economic development was the change in the gross assessed value (GAV) of property, the increase or decrease in the property tax base.
That was then, before the members of the Indiana General Assembly realized they were ordained to change the world. They gave away generous exemptions and deductions to property owners which reduced the GAV and consequently the property tax base. They capped property taxes and pushed through a constitutional amendment to that effect.
In addition, the legislature concluded businesses could not survive if they had to pay any local taxes and, therefore, set in motion a process to reduce and eliminate taxes on inventories, machinery, and other means of production. They also gave local governments the power to phase-in or divert business property taxes through abatements and TIFs (tax increment financing districts). Now, firms expect these breaks as a natural right for almost anything they do.
Once, we expected GAV to tell us how we were doing with our ED efforts. Now, how to evaluate ED performance is a mystery. Politicians love the number of jobs promised as the primary measure of successful programs. More sophisticated analysis focuses on the changes in earnings realized in a community.
Yet changes in GAV should be the most telling indicator of how a community is doing. The prices households and firms are willing to pay for the land, plus the structures and equipment they bring to a community, may be the best measure we could have of economic development.
Next week, in this space, we’ll examine what has happened to GAV throughout Indiana in the past few years. Spoiler alert: it’s not a pretty story.
Mr. Marcus is an economist, writer, and speaker who may be reached at firstname.lastname@example.org.