Bureau of Business Research College and Graduate School of Business, University of Texas at Austin June 1994 An Integrated Approach to Environmental Protection The object of environmental protection is some net benefit-ideally, maximum net benefit-to society. To that end, the coordination, or integra­tion, of environmental protection activities of two or more different agencies can contribute to net benefit maximization and cost minimization. Society can benefit from the integration of these activities in several specific ways. First, decision makers can assign specific tasks to the agencies best equipped to accomplish the tasks at the least cost. Second, assigning responsibilities helps avoid duplication of effort and possible conflict among agencies. Third, such coordina­tion minimizes the chances that the environmen­tal protection activities of one agency will be weakened or nullified by the activities of another agency with a different objective. Fourth, the integrated approach maximizes the opportunities for achieving two or more objectives with one instrument. A special dimension of the integration problem arises when an agency, originally created for another purpose, is assigned an environmental protection task that is not complementary with that agency's traditional work. The agency must then sort among its several objectives to deter­mine how much of one should be sacrificed to achieve a given amount of the other(s). Robert W. Hahn has recently addressed the formal (__ economics of establishing trade-offs among competing objectives and using tractable permits to implement efficient choices by firms that must comply with emissions control regulation. 1 In this article, we consider a different aspect of the integration problem: two or more agencies having some responsibilities for contributing to a single objective. Here the trade-off, in effect, is between service instruments, rather than between alternative services. This dimension of the inte­gration problem has not received the attention it deserves. For purposes of illustration, we focus on the particular service of urban smog control, including the possible assignments, instruments, and interrelations of an integrated approach to this pollution problem. The Example of Urban Smog Control Urban smog emanates from both stationary and mobile sources of emissions, the latter often being the principal factor. With this taken into account, the agency activities relevant to an integrated approach to control should include at least all of the following: General air quality control. The technology for economically monitoring mobile sources for unwanted emissions does not yet exist. Therefore, direct pollution control, which can work well on stationary sources, is ineffective with mobile sources. The now favored means of controlling emissions from stationary sources is tractable permits. Ifauctioned by the authorities, these permits can yield revenues, which suggests a linkage with fiscal policy. A similar linkage applies with automotive fuel taxes, which can differentiate among fuels on the basis of environ­mental effects and can also be substituted for less desirable taxes. Jll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr Electric utility regulation. Control of air pollution by electric utilities presents a special case of stationary source control because regula­tory agencies already exist for a different public purpose. Pollution control in this instance can be efficiently implemented with a combination of tractable permits, auctioned or not, and fuel selection within the framework of integrated resource planning. In the long run, utility plant location decisions, as affected by both conven­tional regulatory choices and land use planning, can moderate the damages from unwanted emis­sions and perhaps reduce the optimal degree of emissions restraint. The location of generating plants and the ultimate cost of electricity can also significantly affect the net environmental benefits of substituting battery-powered for fossil fuel­powered automobiles in urban areas. Transportation provision and control. Traffic congestion correlates with air pollution from automotive sources: both are directly related to concentration of traffic at particular times of day, especially in the morning and evening "rush hours." Congestion can be relieved, at least temporarily, by increasing street and freeway capacity (e.g., by adding traffic lanes). However, this incurs great cost for two reasons: (1) more capacity invites the location of new subdivisions and economic activities, thereby creating more traffic; and (2) capacity designed to accommo­date peak traffic loads implies excess capacity most of the time. Consequently, the most eco­nomical solution is to "price" streets and free­ways, varying the price according to the time of day and level of demand. Pricing discourages discretionary travel during rush hours and en­courages the uses of alternative routes, car pool­ing, and public transportation. Until recently, street and freeway pricing would have been counterproductive as a means of reducing congestion and speeding traffic flow because it necessitated frequent stops (or slow­ downs to toss a coin into a receptacle) at toll booths. Now, however, electronic and computer technology makes it possible to charge automo­ biles the price of admission to a street or road without requiring a stop or even deceleration at control points.2 It is therefore now feasible to control both traffic congestion and the resulting air pollution with one instrument that also yields revenue. Street and freeway construction and mainte­nance. Streets and freeways not only connect where people live with where they want to go, they also influence the future location of both origins and destinations. As mentioned, this is one reason why endless expansion of capacity is an inefficient method of dealing simultaneously with congestion and automotive air pollution. Urban sprawl surrounding a central concentration of work and shopping locations translates into high social costs in terms of time, accidents, and impaired health. The planning of street and freeway systems in combination with pricing can, in the long run, alter the layout of metropolitan areas, optimizing public investment in and main­tenance of transportation facilities, on the one hand, and minimizing the private cost of routine travel time, on the other. Zoning and land use planning. A more direct way of influencing the layout of metropolitan areas, but one that should be integrated with street and freeway construction, is zoning and land use planning. Beyond controlling mobile source pollution, this instrument, given prevailing winds and topographical features, can also affect the location of stationary sources of pollution so as to reduce the damage of given emission levels to persons and property in residential and com­mercial areas. Emissions that are sufficiently distant from receptors as to allow substantial dispersal may be harmless, whereas the same emissions in concentrated form could be deadly. The planned spaces between emitters and popula­tion concentrations-if devoted to uses such as woodlands and parks, which simultaneously provide recreation, biodiversity, carbon dioxide absorption, and scenic pleasure-can add to net environmental benefits. Finally, zoning and land use planning can also be usefully combined with incentive property taxation that puts a higher price on environmentally harmful land uses and a lower price on beneficial uses. Combination and Coordination As the foregoing discussion suggests, it is possible to use many different combinations of agencies and control instruments to combat pollution. In the case of urban smog, two ex­ amples illustrate this point. To limit unwanted Jll I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr Jtlllllllll lllllllllll llllllllllllllll llllllllllllllllllllllllllllll llllllllll llll#r Environmental Protection (continued) emissions from mobile sources, a city could com­bine a short-term solution (street pricing and "green" property taxes) with a long-term approach (coordinated freeway construction and land use planning), while accumulating revenues to sub­sidize alternative public transportation. To con­trol unwanted emissions from stationary sources, a city could combine auctioned tradable permits with zoning and integrated resource planning on the part of electric utility plants, again gaining revenues for tax substitution or for complemen­tary expenditures, such as tree planting. Every urban situation is unique, of course, and no single combination is likely to fit every one­or fit any one forever. What is needed is not a formula for, but a way of thinking about environ­mental problems that leads to creative least-cost combinations that are adaptable to changing circumstances. An integrated approach to pollu­tion control that assigns subtasks to the agencies that can perform them most efficiently, avoids duplication and offsetting actions, relies primarily on market-based incentives, and incorporates supportive fiscal policy promises to minimize the costs of achieving given benefits. -Stephen L. McDonald, Ph.D. Addison Baker Duncan Centennial Professor in Economics and Senior Fellow, Bureau ofBusiness Research and Mina Mohammadioun, Ph.D. Head, Natural Resources Program Bureau ofBusiness Research Notes 1. Robert W. Hahn,"A New Approach to the Design of Regula­tion in the Presence of Multiple Objectives," Journal ofEnvi­ronmental Economics and Management, 17, 1989, pp. 195-211. 2. The technology involves a chip that is attached to the windshield of a car and registers a charge against its purchase price each time the vehicle passes a cqntrol point detector. For a thorough discussion of the economics of street pricing, see Paul W. Wilson, "Welfare Effects of Congestion Pricing in Singapore," Transportation, 16, 1988, pp. 191-210. Tax Incentives (continued) sharing that nets the federal government up to 38 cents for every dollar given away by state and local governments. The higher federal tax liabil­ity resulting from forgone state and local taxes also points out that the actual dollar savings for recipients of abatements are substantially re­duced.) An alternative solution would be for Texas and other states to pass legislation banning the use of tax abatements for industrial development pur­poses. (Indeed, prior to 1987, such uses were prohibited by the Texas Constitution.) Policy­makers should reexamine the compatibility of abatement programs and industrial inducement packages with state and local economic develop­ment needs and objectives. At the same time, they should reconsider the factors that really matter in economic development. A strategy that emphasizes investments in high quality public education, a well-trained workforce, and a solid physical infrastructure over industrial recruitment will deliver greater long-term payoffs. New and expanding businesses should also be expected to invest in local areas because they are among the prime beneficiaries of such a strategy. In short, giving away the tax base is no way to make it grow. -Bernard L. Weinstein Director, Center for Economic Development and Research, and Professor, Economics University ofNorth Texas ) Jttllllllllllllllllllllllllllllllllllllllllllllllll llllll lllllllllllllllllllllllll#r lllllll lllllllllllllllllllllllllllllllllllllllll lllllllllllllllllllllllllllllllll'Ar Employment and Unemployment Rate by Metropolitan Area Total nonagricultural employment (thousands) Total employment (thousands) Unemployment rate Area Mar. 1994 Mar. 1993 Percentage change Mar. 1994 Mar. 1993 Percentage change Mar. 1994 Abilene 50.4 SO.I 0.6 54.9 54.3 I.I 6.3 Amarillo 84.2 81.8 2.9 JOO.I 96.l 4.2 4.7 Austin-San Marcos 465.2 445.6 4.4 539.1 516.1 4.5 4.0 Beaumont-Port Arthur 151.5 149.1 1.6 166.6 163.6 1.8 10.9 Brazoria 72.3 69.4 4.2 99.8 93.8 6.4 7.6 Brownsville-Harlingen 91.9 85.7 7.2 107.6 IOI.I 6.4 12.4 Bryan-College Station 63.0 61.l 3.1 66.8 64.9 2.9 3.2 Corpus Christi 140.4 140.6 -0.l 153.5 155.4 -1.2 10.0 Dallas 1,508.4 1,447.1 4.2 1,551.9 1,490.3 4.1 6.1 El Paso 228.5 221.4 3.2 251.2 241.2 4.1 11.5 Fort Worth-Arlington 617.0 602.6 2.4 737.8 723.8 1.9 6.5 Galveston-Texas City 85.0 83 .5 1.8 114.6 113.3 I.I 9.0 Houston 1,676.7 1,643.0 2.1 1,795.8 1,750.6 2.6 7.3 Killeen-Temple 84.9 81.4 4.3 99.0 95.4 3.8 6.3 Laredo 54.7 52.5 4.2 58.9 56.2 4.8 9.7 Longview-Marshall 79.8 77.2 3.4 90.0 87.6 2.7 9.5 Lubbock 104.1 101.9 2.2 111.5 109.9 1.5 5.0 McAllen-Edinburg-Mission 121.3 112.4 7.9 150.7 140.5 7.3 16.8 Odessa-Midland 91.3 90.4 1.0 107.2 105.4 1.7 8.2 San Angelo 39.7 39.1 1.5 47.0 46.3 1.5 6.0 San Antonio 583.8 565.6 3.2 653.l 628.8 3.9 5.4 Sherman-Denison 37.6 36.3 3.6 42.6 42.l 1.2 7.4 Texarkana 47.6 48.0 -0.8 51.4 51.7 -0.6 9.8 Tyler 67.3 65 .8 2.3 76.2 74.1 2.8 6.5 Victoria 34.0 31.3 8.6 40.4 37.6 7.4 6.7 Waco 87.2 84.6 3.1 90.7 88.8 2.1 5.6 Wichita Falls 53 .9 52.4 2.9 58.6 57.5 1.9 6.2 Total Texas 7,615.8 7,378.1 3.2 8,594.6 8,353.3 2.9 7.2 Total United States 110,792.0 108,672.0 2.0 120,844.0 117,406.0 2.9 6.8 Note: Data are not seasonally adjusted. Figures for 1993 have undergone a major revision; previously published 1993 figures should no longer be used. Revised figures are available upon request. All 1994 figures are subject to revision. Sources: Texas Employment Commisson and U.S. Department of Labor, Bureau of Labor Statistics. Nonagricultural Employment In Five Largest Texas Metropolitan Areas (January 1984= 1.00) 1.65 1.60 1.55 1.50 1.45 1.40 1.35 1.25 1.20 1.15 1.10 1.05 1990 1991 1992 1993 1994 Total Employment In Five Largest Texas Metropolitan Areas (January 1984= 1.00) 1.65 1.60 1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 Houston San Antonio 1.05 1990 1991 1992 1993 1994 llllllllllllllllllllllllllllllllllllllllllllllll lllllllllllllllllll lllllllllll lll'Ar ltl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr Tax Incentives and Abatements: Economic Boon or Boondoggle? In recent years, state and local governments have increasingly used tax credits and other fiscal incentives to stimulate economic development. In 1993, Alabama dangled a $330 million carrot in front of Mercedes-Benz in order to "win" a contest with Georgia and North Carolina for a proposed auto assembly plant. At a cost of nearly $220,000 per promised job, the Alabama deal­offering free land, site development, and tax abatements-is one of the biggest in the annals of interstate competition, surpassed only by the $840 million proffered to Northwest Airlines by Minnesota in 1991 and the $500 million given by Indianapolis to United Airlines that same year for maintenance bases. Why do states and cities waive hundreds of millions of potential tax dollars in their efforts to lure industry? Proponents of tax breaks argue that their use creates a favorable business climate and that economic development has become, in prac­tice, a competitive bidding war. Put differently, this conventional wisdom suggests that any com­munity not willing to offer incentives comparable to or greater than those of competing jurisdictions will permanently lose business opportunities. This view is perpetuated by the legions of indus­trial location consultants who take advantage of local economic insecurity, extracting the largest possible number of concessions for their clients by playing communities against one another. Those opposed to tax incentives argue that their costs far exceed measurable community benefits. The expensive pursuit of new business, they contend, creates resentment among owners of existing businesses who, in effect, help subsi­dize the operations of new companies that may eventually become competitors. What's more, in many states the real property tax base has been contracting in recent years. Under the guise of economic development policy, state and local governments seem to be offering a larger slice of a shrinking pie to outside industries. The proliferation of tax abatements also raises some important questions: What are the appropri­ ate state and local government roles in encourag­ ing business development? Are direct and indi­ rect financial inducements the most effective approach? How does a state's overall business and individual tax structure affect industrial location and expansion decisions? And finally, don't tax incentives, which are inherently dis­criminatory, fly in the face of political and economic concerns about treating taxpayers uniformly? Tax abatements and credits are misnomers. Overall fiscal burdens aren't reduced; they're simply shifted from one class of taxpayers to another. To make matters worse, while taxes are being waived, the new business is placing ex­traordinary demands on state and local govern­ment agencies for roads, water, and sewer hook­ups, police and fire protection, and other public services. Although tax incentives have become the centerpiece of economic development policy in many communities, more than 30 years of re­search and experience reveals that these programs have had little or no impact on patterns of indus­trial location. In 1967, the U.S. Advisory Commission on Intergovernmental Relations concluded that "the practice of making special tax concessions to new industry can have baneful effects by setting in motion a self-defeating cycle of competitive tax undercutting and irrational discriminations among business firms." A 1989 study by the Council of State Governments found no statistical evidence that business incentives actually create jobs or that fiscal inducements are a primary factor in business location decision making. If tax incentives don't matter, but communities feel politically pressured to offer them, what's the solution? In several Texas communities where local governments have been overly generous with abatements, local taxpayer organizations have discussed bringing class action suits against city and county officials. Another solution might be for Washington to send a dollar less in federal aid to state and local governments for every dollar of tax concession they offer. Such a course seems unlikely, however, because the U.S. Treasury benefits from the status quo whereby a company's federal tax liability increases as its local tax payments decrease. (This occurs be­cause state and local taxes are deducted, along with other operating costs, in calculating federal taxable income, a form of reverse revenue­ ltl I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I IJDr lll I I l l I l l l I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I I ltur Announcement The 1994 Directory of Texas Manufacturers is now available. Listing more than 17,000 Texas plants, the directory includes product informa­tion, sales volume, and names of selected offic­ers. Nearly 900 new firms have been added to the 1994 edition. The two-volume set contains alphabetical, geographic, and product sections and is supplemented monthly by reports on new and expanding firms in Texas Industrial Expan­sion. The publications are available as a package for $130 plus tax for Texas residents. Texas Industrial Expansion may be purchased sepa­rately, and both publications are available in electronic form. To order by phone, call (512) 471-1616; by fax, (512) 471-1063. For company information on diskettes or mailing labels, call (512) 471­5180 for details. Editor: Lois Glenn Shrout Assistant Editor: Sally Furgeson Texas Business Review is published six times a year (February, April, June, August, October, and December) by the Bureau of Business Re­search, Graduate School of Business, University of Texas at Austin. Subscriptions to Texas Busi­ness Review are available free upon request, as are back issues. The Bureau of Business Research serves as a primary source for economic and demographic data on the state of Texas. An integral part of UT Austin's Graduate School of Business, the Bureau is located on the sixth floor of the College of Business Administration building. ·patsanb;u uon:la.uo:l ssa.1ppv SOd ' V:J 99'1S!-.i O£t,•z 1.Jd NilSO~ lY Kl 30 AINO 6~vl-£Il8l smc;}i 'upsnv 6~tl xos: Ud H~::i:s::rn ss::i:Nrsng .fO nvmmg S31~ 311 NJ9-J3NJMl~]~ ~ --------­-----­