KOZs continue to be hotly debated. KOZ stands for Keystone Opportunity
Zone. They are currently being debated in our neck of the woods at the
Shenango Institute. The institute is located in Grove City, Pennsylvania,
where KOZs were recently considered by the Grove City Borough Council.
The proposed legislation would grant tax relief for a considerable
period -- between ten and thirteen years -- to businesses that are created within
designated "opportunity zones." KOZs seek to eliminate virtually all local
and state taxes in designated zones/areas. The goal is to foster economic
development within those communities.
KOZs are certainly not merely a Grove City issue. They should be closely
considered, and pursued, throughout all of Pennsylvania. Indeed, with
Pennsylvania classified as one of the highest business taxing states, who
could be against KOZs?
Interestingly, there is actually some disagreement among free-market
conservatives on the KOZs issue. For instance, one of my colleagues at the
Shenango Institute -- John Sparks -- is against KOZs. This is ironic: John is
a big supporter of low taxes and free markets. His opposition, however,
stems from a couple concerns.
First, John argues that KOZs will not give tax relief from the high
Pennsylvania taxing environment to all businesses. "That would have to be
accomplished by a general tax cut and would be most welcome," says John.
"Instead, only new enterprises coming into the zone receive a 'tax holiday.'
Existing enterprises, which continue to do business, get no tax breaks.
This raises a fundamental question of fairness."
John makes a good point, and offers this illustration: If Mr. Jones owns a
small, established manufacturing enterprise, which employs a score of people
in an existing location, he continues to pay taxes at the full and unabated
rate. In contrast, Mr. Smith, who starts a business in the KOZs, perhaps
even one competing with Mr. Jones, pays no taxes or greatly reduced ones.
Even if the two are not competitors, Jones and other established businesses
like his, as well as ordinary taxpayers, are then required to shoulder the
bulk of the community's tax burden while Smith pays nothing during the exemption
period.
John continues with this argument: "It is sometimes argued that such tax
relief is the only way that deserted facilities will ever be made economical
again. The fact is that the American enterprise system recognizes that
buildings, facilities, and businesses often have to be converted to other
uses." He refers to an example right under our nose here in Grove City --
the former Cooper Energy office building, which is emblematic of many
abandoned industrial buildings scattered throughout the Commonwealth. "The
building is a good example of a structure that is successfully being put to
another use by an investigative services company," states John. "However,
some facilities may be harder to convert, namely the old Cooper plant.
However, an enterpriser who purchases or leases such a building should be
the one who takes the risk of its being a success or a failure. This risk
should not be transferred to the general citizenry or to the established
businesses in the community."
John poses a second problem with the KOZ concept.
KOZs avoid the central
question that he feels legislators in Pennsylvania should be answering: Why
are business taxes and other costs of doing business in Pennsylvania so high
compared to other states?
That's also a solid point. And John cites the data to prove it.
Pennsylvania has the third highest net corporate income tax rate in the
nation. In terms of overall business taxes in Pennsylvania, the
Pennsylvania Economy League maintains that the Commonwealth is 6% higher
than the national average and 4th highest among its 13 leading competitor
states. The Economy League also claims that sole proprietors and partners,
who do not pay corporate taxes, are hit with individual income taxes at 6%
higher than the national average. Pennsylvania is second highest among all
states in two other taxes - the corporate net income (CNI) tax and capital
stock and franchise (CSF) tax.
I agree with John that the Pennsylvania legislature ought to pull out the
fiscal cleaver and hack down the budget so that no higher taxes are required
or, better yet, make significant cuts so that general tax relief can be
given, rather than mere relief here and there in certain fortunate
pre-designated zones.
These are valid points. Still, I would assert that some tax relief is
better than no tax relief. And the tax relief in KOZs can and does have a
salutary effect, including the very positive benefit of underscoring the
fact that low -- to no -- tax areas can be quite productive and even outperform
high tax areas. The mere assumptions inherent within the KOZ concept are a
big step forward. Implicitly, they are a positive acknowledgment of the
value of lowering taxes.
I agree that Pennsylvania taxing bodies should pressure state legislators to
cut spending and do something about the unfortunate business and personal
tax climate in Pennsylvania. Taxes should be slashed well beyond a few
zones here and there. How about this as a compromise? Why not strive to
make all of Pennsylvania a KOZ area? Or, at the least, can we try moving
in that direction?
Paul Kengor is president of the Shenango Institute for
Public Policy. He is also associate professor of political science at Grove City
College and a visiting fellow with the Hoover Institution. His forthcoming book
is Reagan, God, and the Evil Empire (HarperCollins, Regan Imprint).
