Strategy #7: The Role of State Policy

This is one in a series of seven articles on strategies to revitalize rural America. These articles all originally appeared in the Center for Rural Affairs Newsletter. Return to the index of strategies to revitalize rural America.

The Role of State Policy

Through tax reform, rural investment, leadership development, renewable energy, and technology, states can do much to revitalize their rural areas.

State policy can be a powerful force for economic development that builds strong rural communities and creates genuine economic opportunity for people.

It is more difficult in the midst of today’s state budget crises. But it’s not impossible. States must make the commitment to sustain the most important programs for rural revitalization. That sometimes requires a willingness to balance spending cuts with tax increases. And it requires a willingness to scrutinize the use of every dollar available to community and economic development to ensure limited dollars are used in the best way possible.

One place to start is by making common sense reforms in corporate job creation tax subsidies – reforms that could generate substantial savings to reinvest in rural revitalization. States can budget and cap the amount spent on job creation tax subsidies.

States can cut the costs of such programs by imposing job quality requirements on beneficiaries and denying subsidies for poor jobs. In addition, a corporate minimum tax would raise revenue and ensure that all profitable corporations – including those receiving job creation tax subsidies – contribute something to educating kids and providing vital services.

The revenue raised could be used to balance corporate job creation incentives with investments in more entrepreneurial development approaches that work in rural communities – small business, cooperative and grassroots leadership development. Key approaches include:

  • Microenterprise development programs provide grants to programs that provide loans, training, technical assistance, and market development assistance to new and established owner operated businesses, typically with five or fewer employees. Studies have demonstrated that microenterprise development programs create jobs at a fraction of the cost of corporate job creation tax subsidies.
  • Agricultural development programs provide funding and technical assistance for cooperatives and new market development initiatives. There are growing opportunities in higher value products – natural meats, local foods, and other niche products. But family farmers and ranchers must develop new cooperatives and markets to capture those opportunities. Criteria for awarding funds should favor projects that increase the farm and ranch share of food system profit, increase self employment opportunities in farming and ranching, and strengthen small and mid-size operations. Without such criteria, agricultural development programs can easily turn into subsidies for corporate farming and agribusiness development.

Grassroots Leadership and Community Development – Community revitalization starts at the grassroots. Community members must come together, develop their leadership skills, and build consensus and commitment on moving forward in securing their future. States can provide seed funding for technical assistance and training to help communities make it happen and provide the impetus for neighboring communities to band together to make their efforts more effective. The emphasis should be on initiatives that engage the whole community from the grassroots up.

Individual Development Accounts are public or privately matched small savings accounts that can only be used for home ownership, small business development, or higher education. They help people build long-term economic well-being by building assets through home ownership, business ownership, or enhanced education.

Asset building provides important psychological and social effects that cannot be achieved by simply increasing income. It gives people a stake in their community and encourages them to take responsibility for its future. States that appropriate funds for individual development accounts for low and moderate-income people can gain federal matching funds.

Tax Incentives for Rural Development
States can also shape their tax policy to foster the small entrepreneurial approaches that work in rural communities. Few existing businesses tax incentives are designed for the small start-up operations. That could be changed. States could provide an investment tax credit for starting or expanding owner-operated businesses with five or fewer employees.

That concept is embodied in proposed federal legislation – the New Homestead Opportunity Act introduced by Senators Byron Dorgan (D-ND) and Chuck Hagel (R-NE). It would provide a tax credit equal to 30 percent of the money invested by an individual in starting or expanding their own small business. The maximum tax savings would be limited to $25,000 over five years. The Act has not passed. This approach could be adopted by states.

Property tax relief can be designed to strengthen small and medium-size farms and ranches and thereby open opportunity to more beginners. For example, states could provide income tax credits when property taxes on owner-operated farmland take an excessive share of the operator’s income. By limiting the relief to a modest amount of land, such a provision could target relief to smaller and beginning farmers and help them compete for land with larger operations. Maintaining small and mid-size farms and increasing the number of beginners is rural development.

Such an “owner-operator tax credit” could be combined with a similar tax credit for modest income homeowners – both rural and urban. That might give it the votes to pass in legislatures that rarely have the rural votes to pass property tax relief targeted only to farmers and ranchers.

Tax credits can also provide incentives for landowners to rent land to beginning farmers. The Nebraska Legislature created a program to provide a tax credit to landowners who rent land to beginners for a share of the crop. Share rents substantially reduce the capital requirements of getting started, and they provide a means for the landlord to share some of the risk of falling prices and crop failure. The tax credit can offset the risk that a landowner assumes in share renting land to a beginner.

Such incentives can be broadened beyond farming and ranching to also encourage innovative and favorable leases of existing non-farm businesses to new operators. Many rural business people are nearing retirement. Incentives for them to transfer their businesses to a new generation could make a critical difference in determining whether businesses are shut down and their assets sold, or new families are offered the opportunity to start businesses and lives in rural communities.

Finally, the tax code can provide incentives for charitable giving in support of community development. Many rural retirees hold substantial assets and are in a position to give back to their community. The state of Montana provides income tax incentives for people to donate to community foundations and other nonprofit charitable initiatives to foster community development and community institutions. It is estimated to have created $74 million of endowment for community development over five years at a cost of $24 million.

Boost Renewable Energy Opportunities
Renewable energy production offers rural communities the chance to become energy producers, rather than energy importers. Recent reductions in the cost of wind generation of electricity combined with federal tax credits open opportunities on the windswept plains. State policy-makers can give a boost to wind energy development by establishing a requirement for the minimum percentage of a state’s electricity that must be generated from renewable sources.

In Nebraska, the Legislature may need to revise its longstanding policy of requiring public power producers to provide power at the lowest cost possible, to allow environmentally friendly alternatives that support community development. Other states have adopted tax credits and public funding for generating electricity from renewable resources.

States also have numerous tools to promote development of liquid fuels from biomass, including providing incentive funds for developing biofuel projects and requiring that service stations sell gasoline that includes biofuel blends.

Encourage Internet Businesses
States can act to overcome the digital divide – to ensure that rural people have access to high-speed internet service. The policy options are too numerous and complex to discuss here. New technological developments are reducing, though not eliminating, barriers to quality internet service in rural areas.

The key rural development challenge is ensuring that rural businesses are able to use the full potential of the Internet to sell in large, distant markets. The initial impact of the internet may be more negative than positive for rural economies by enabling distant retailers to penetrate rural markets formerly controlled by rural businesses. States should consider options for funding or directly providing technical assistance to rural businesses on how to use the internet to its full advantage in reaching new, distant markets.

Distribute State Job Locations

State expenditure is a powerful driver of economic development. Where the state spends, the economy grows. Typically, state expenditures are concentrated in the capital city and metropolitan centers. But states can establish explicit policies to distribute state jobs and money to rural areas when feasible.

Contact: Chuck Hassebrook, or 402.687.2100, extension 1018 for more information. This is the seventh and final article in our series on Strategies to Revitalize Rural America.

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