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STATE POLICY & ECONOMIC DEVELOPMENT IN OKLAHOMA: 1992
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OKLAHOMA 2000, INC. BOARD OF DIRECTORS WALTER V. ALLISON Chairman & Chief Executive Officer WeatStar Bank, N.A Bartlesville JAMES 8B, ELLIS President-Oklahoma Division Southwestern Bell Telephone Company Oklahoma City JUDITH EVANS Program Coordinator Oklahoma 2000, Inc Oklahoma City MARTIN E, FATE, JR, President & Chief Executive Officer Public Service Company of Oklahoma Tulsa GILBERT ©, GIBSON Chairman of the Board Citizens Bank Lawton JAMES G, HARLOW, JR, Chairman of the Board, President & CEO Oklahoma Gas & Electric Company Oklahoma City ROBERT S, KERR, JR, President Kerr Foundation, Inc. Oklahoma City ROBERT F, LUSCH Dean College of Business Administration University of Oklahoma Norman FRANK A. MCPHERSON Chairman of the Board & CEO Kerr-McGee Corporation Oklahoma City DONALD A. MURRY Profeysor of Economics College of Business Administration University of Oklahoma Norman DENNIS R. PARKER Refinery Manager and Vice President, Coordination Management Conoco Ine. Ponca City RALPH 8. RHOADES President & Chief Executive Officer Blue Cross and Blue Shield of Oklahoma Tulsa RICHARD P, RUSH President & Chief Executive officer The Oklahoma State Chamber of Commerce and Industry Oklahoma City ROBERT L, SANDMEYER Dean College of Business Administration Oklahoma State University Stillwater J.D, SCOTT Chairman of the Board, President & CEO ONEOK Ine, Tulsa LARKIN WARNER Professor of Economica College of Business Administration Oklahoma State University Stillwater JOSEPH H. WILLIAMS Chairman & Chief Executive Officer The Williams Companies, Inc. Tulsa Published February, 1992 Copies of this publication are available from: OKLAHOMA 2000, INC. 4020 N, Lincoln Boulevard Oklahoma City, Oldahoma 73105 (405) 427-8877
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OKLAHOMA 2000, INC. KLAHOMA 2000, INC.,, affiliated with the Oklahoma State Chamber of Commerce and Industry, is 8 nonpartisan, nonprofit corporation created to perform and promote research regard- ing the rolo of industry in the civic, sociological and cultural betterment of the citizens of the State of Oklahoma, OKLAHOMA 2000, INC, makes the results of its studies available to members af vari- ous State and Federal goyernment agencies, legis- latoys and the general public. OFFICERS JAMES G. HARLOW, JR. Chairman J.D. SCOTT Vice Chairman DONALD A. MURRY President: LARKIN WARNER Vice President RICHARD P. RUSH Secretary JUDITH EVANS Program Coordinator
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STATE POLICY AND ECONOMIC DEVELOPMENT IN OKLAHOMA: 1992 _ A REPORT TO OKLAHOMA 2000, INC. by Dr. Alexander Holmes Regent's Professor of Economics University of Oklahoma Mr, Craig Knutson Staff Economist Southwestern Bell Telephone Company Dr, Gerald M, Lage Professor of Economics Oklahoma State University Dr. Donald A, Murry Professor of Economics University of Oklahoma Dr. Kent W, Olson Professor of Economics Oklahoma State University Dr. David Penn Assistant Director Center for Economic and Management Research ‘The University of Oklahoma
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TABLE OF CONTENTS = Preface iv Introduction v Chapter I Oklahoma's Special Programs Gerald M. Lage 1 for Economic Development Chapter IL Oklahoma Tax Expenditures for Alexander B, Holmes 29 Economic Development: Post HB 1444 Chapter DI Marketing and Awareness of State David Penn 39 Financial Assistance Programs Craig Knutson Chapter IV The 1990 Clean Air Act Amendments Kent W. Olson 57 and Their Impact on Oklahoma Donald A, Murry
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tate economic policies are a culmination of many administrative procedures, legislative actions, regulatory rulings and court decisions. Sometimes the policy trends are clear, and some- times they are not, The purpose of this publication is to examine and report on four of these policy issues that are important in 1992 and will be im- portant in the longer-term. It is the intent of Oklahoma 2000, Inc. that these articles be infor- mative, objective and address issues of potential strategic economic significance to the state. ‘The current project was performed by econo- mists from Oklahoma's institutions of higher education and industry, As in previous years, the research team, in conjunction with members of the Board of Directors of Oklahoma 2000, Inc., 36+ lected the topics for the 1992 study, The views expressed herein are those of the authora and should not be attributed to the officers and direc- tors of Oklahoma 2000, Inc.
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INTRODUCTION n early 1992, the United States is in a con- tinuing recession. Policy makers and business leaders worry about expansion and the new prob- lems of economic growth and competing in a restructured world. Those national and interna- tional concerns reflect on the economic deyelop- mont prospects at home and the efficacy of de- velopment program for the State of Oklahoma. Al- though the 1992 edition of the State Policy & Loo: nomie Development in Oklahoma is predicated upon the practieal and domestic concerns about the state's development programs, readers will, porhaps unconsciously, review it in the context of the evolving development requirements. The changing economic environment serves as a reminder to all planners that unpredictability is a certainty. And change forces analysts always to evaluate their previous studies and plans, built, in an earlier environment, to see if the design atill is appropriate for the new surroundings, In a ree view of the economic development programs, many of Which have been put in place only in the past five years, Gerald Lage identifies the activi- tias of these programs, compares their content to similar programs in surrounding states and al- tempts to evaluate Oklahoma's overall program competitiveness, Dr, Lage, in an unusual survey, asks the economic development professionals throughout the state how they view the various programs and whether or not Oklahoma's “pack- age” is competitive, The results are moat encour: aging, Although financial incentives appear to be least competitive, gendrally the development spe- cialists view the programs favorably. Of course, the professionals identified specific needs based on their practice and observations, but Dr. Lage points out, these needs are often special cases. Many are special requirements that would best serve particular industries or regions. He pre- seribes responding to these special needs by flex- ibly designing programs that we haye. Tra related article, Mexander Holmas codifies and evaluates the tax expenditures, often in the form of apecial tax preferences, to support indi-~ vidual companies, for the purposes of furthering economic development. Dr. Holmes identifies the Sales and Use ax abatemont as the predominant form of tax preference by state government to at- iract company expansion in Oklahoma, He also idwntifies the increasing use of tax preferences, and reports that impacl upon revenues and the State's tax base, David Penn and Craig Knutson investigated the manner in which manufacturers in the State of Oklahoma learn of state financial assistance programs uyailable to them. The authors recog- nized that the state receives the greatest economic benefits frorn financial assistance programs only hy supporting the "best" possible programs from the standpoint of their impact on state economic development, The authors structured a research project that would disclose how manufacturing énterprises learn of the potential financial assis- tance at times whon it is needed. Recognizing the loan officers of banks are a point of contact at the time manufacturers require financing, they also investigated the role of loan officers in this infor- mation process. To investigate the information procesa, they conducted telephone interviews af samples of manufacturers’ financial officers and loan officers of banks. There were some surprises. As the authors stated, “it is astonishing to loarn that 80 percent of these manufacturers are not ut all aware that state government offers a variety of financial assistance programs to tho private see- tor.” Based upon the survey findings, the authors were also able to identify some mechanisms that may help get the most economically significant projects in the funded-project pool. Kent Olson and Donald Murry reviewed a majov federal program, the Clean Air Act Amend- ments of 1990, that will significantly affect Okla- homa businesses and state agencies both in the near-term and strategically, The authors detailed significant elements of the legislation and the emerging regulations and investigated their de- mands upon Oklahoma Government as well as the private sector. The legislation requires state gov- ernment lo proyide & comprehensive permitting and monitoring program. The authors consider the compliance coats that Oklahoma City and Tulsa will face if either goes on the “dirty air list. They also review some of the economic development implications. A major change in the ecanomic en- vironment of clean air regulations is the inclusion of businesses never before affected by ¢lean air legislation. Some areas of the legislation are so complicated, such as the acid rain provisions, that the impacts are not yet clear, but the policy pre- scriptions are revolutionary, The authors note that there is another side to the CAAA also. Not all of the impacts will be negative to Oklahoma, Tho natural gas industry will, without doubt, benefit. from some increased demand as a result of the legislation.
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CHAPTER I Gerald M. Lage OKLAHOMA'S SPECIAL PROGRAMS FOR ECONOMIC DEVELOPMENT INTRODUCTION AND PURPOSE he long-run trends of Oklahoma’s economic development are generally well known. Oil and agriculture dominated the resource-based de- velopment of the economy, for better or worse, and the population decline following the depression of the 1930s was finally reversed in the 1950s, but only in the late 1970s did the state finally increase its percentage share of the national population. The extraordinary energy-led growth after 1973 began to be taken for granted and the national re- cessions of 1980 and 1981-82 were barely noticed. Nonetheless, the end of easy growth without con- scious public policy choices would soon become painfully obvious. Almost any aggregate income or employment indicator will tell Oklahoma’s economic story of the 1980s. The graph of real per capita personal income in Chart 1 displays the dramatic end of the energy boom in 1982. Just as most of the rest of the country came out of the recession that year, Oklahoma began its five-year economic slide. The state’s relative income, which had _ virtually reached parity with the national average, fell to levels of 80 percent or less in the late 1980s. A turnaround was not to come until the spring and summer of 1987 when real incomes per person started to rise again. Perhaps ironically, that was also the time that several years of study and de- bate on Oklahoma’s economic future culminated in legislation to stimulate growth and diversity, led by House Bill 1444 — the Economic Development Act of 1987. The economic hardships caused by a decline in Oklahoma’s growth rate spawned many studies dedicated to the determination of innovative eco- nomic development incentives. During the sum- Gerald M. Lage is Professor of Economics at Okla- homa State University, Stillwater, Oklahoma. mer of 1986 Kent Olson opened his review of 93 such works, most written within the previous five years, with the observations: The development of the state’s economy may be the number one social issue today in Oklahoma. It was not always so. However, the economy has faltered badly only recently, and what becomes fashionable in social problems is often dictated by the sweep of history. Other reports about the same time were by Beldon Daniels? and the Hudson Institute.? The purpose of this chapter is to review spe- cial programs developed to encourage the forma- tion, growth, and retention of private businesses in Oklahoma. The programs discussed here result from direct expenditures on various types of ser- vices that complement the broad classes of eco- nomic development incentives provided by tax and financing incentives, especially those that provide training, information and cost-reducing services that make firms more competitive in their mar- kets and the state more profitable as a business location. The plan of the chapter is to briefly review the logical framework justifying these economic de- velopment services as potentially desirable public policy.4 Individual programs are then described, and their performance is measured when data are available. Finally, a survey of local economic de- velopment professionals is described which re- veals general satisfaction with the state’s pro- grams in comparison with those of surrounding states. A brief review of policy options for further enhancement of incentive programs concludes the chapter. ECONOMIC DEVELOPMENT INCENTIVES OF NEIGHBORING STATES To place in perspective the specific targeted economic development incentive programs of
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CHART 1 Oklahoma Per Capita Real Personal Income $1982 Quarterly, 1980 (Q1) — 1991 (Q2) 11,800 14,500 14,200 10,300 10,900 i" 10.800 + i = qT T 1980 1981 1982 1983 1984 Oklahoma that are the subject matter of this chap- ter, data comparing programs of tax incentives, fi- nancial assistance, and special programs for the states bordering Oklahoma are presented in Tables 1, 2and 3. The data have been provided by re- searchers for the Site Selection publication, and represent the information that is “on the street” for professional economic developers to use in their consultations with firms seeking new locations. More detailed information on tax incentives is con- tained in the chapter by Alexander Holmes in this volume. Oklahoma's programs of financial assis- tance were described in last year’s Oklahoma 2000, Inc. research report by Larkin Warner and Stephen Smith. A cursory review of those tables and the analysis to follow indicate that Oklahoma's incen- live package should enhance the states’s ability to compete, ‘That, of course, is not to say that im- AD q | qT q 1985, 1986 1987 1986 1989 1994 provernents cannot be made in existing programs or that yet-to-be developed new ones cannot be added. ‘THE ECONOMIC RATIONALE FOR STATE DEVELOPMENT INCENTIVES On a national level there is considerable de- bute concerning the justification for economic de- velopment incentives that generally interfere with the free flow of market-determined economic deci- sions. It is recognized that money spent on, and taxes not collected from, individual businesses rep- resent. foregone opportunities to improve education, transportation facilties and others areas of infra- structure that might provide more general assis- tance to many business enterprises, rather than a select few.
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TABLE 1 Financial Assistance for Industry OK AK co KS LA MO NM TX Stale Sponsored Industrial Development Authority Ng y Y Y Y Y Privately Sponsored Development Credit Corporation Y Y24 4 v4 Y State Authority or Agancy Revanue Bond Financing Y Y Y v2 Y Y ¥ State Authority or Agency General Obligation Bond Financing Y Y2 Y Y26 City and/or County Revenue Bond Financing Y Y Y ry, * Y Y Y City and/or County General Obligation Bond Financing Y y Y Y Y ¥ ¥ State Loans for Building Construction Y Y Y Y25 Y Y b State Loans for Equipment, Machinery Y Y i Y25 Y Y Y City and/or County Loans for Building Construction Y Y YI Y Y26 Y yy, Gity and/or County Loans tor Equipment, MachinerY Y ¥ v1 Y ‘Y26 Y ne State Loan Guarantees for Building Construction Y Y6 Y Y Stale Loan Guarantees for Equipment, Machinery Y Y Y6 Y Nb City and/or County Loan Guarantees for Building Construction ia Gity and/or County Loan Guarantees for Equipment, Machinery Y State Financing Aid for Existing Plant Expansion Y Y Y Y v2 Y Y ie State Matching Funds for City and/or County Industrial Financing Programs Y Y’ vio Y State Incentive for Establishing Industrial plants in Areas of High Unemployment y Y Y ¥ Y Y ry, City and/or County Incentive for Establishing Industrial Plants in Areas ofHigh Unemployment Y ¥ wi Y Y Y ~ Source: Site Selection, October 1990. ited only in specified municipalities, Y2 = State allows cities or counties to affar financial aid for existing plant expansions. In Louisiana, financing ald Is directly Involved ‘only in the case of those port authorities whose obligations are backed by the full faith and credit of the stato, ‘4 « Authorized but none is active, Y6 = Louisiana Economic Development Corp. can participate in or guarantee loans ta banks for small business of socially of econom|- cally disadvantaged persons unable to obtain assistance through traditional means. ¥19 = Louisiana Economic Davelopment Corp,, through Ihe Small Business Equity Program, can loan money to local community development corporations that quality as a state licensee through the Office of Financial institutions. LEDEC can also match private Investment in qualified venture capital funds on a 1- to-2 basis up to $2.5 million. Y25 = State Market Commission makes loans for buying, building and improving agri-industrial plants. Y26 = Economic and Industrial Development Corp, (EIOC) makes loans for new and/or existing businesses, construction, land, equip: ment, machinery, ate.
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TABLE 2 Tax Incentives for Industry OK AK co KS LA MO NM TX Corporate Income Tax Exemption vI7 v v2 Y32 Y 25 Personal Income Tax Exemption Y ¥2,63 Y63 Y Y25 Excise Tax Exemption Y Y24 Tax Exemption or Moratorium on Land, Capital Improvements Y8 Yu 30 Y33 Y Y 58 Tax Exemption or Moratorium on Equipment, Machinery Y vit 1) Y30 Y6 ¥ 58 Inventory Tax Exemption on Goods In Transit (Freeport) ‘4 Y Yy Y Y Y ¥ Tax Exemption on Manufacturers Inventories Y66 b ¥5 vi Y State/Use Tax Exemption on New uipment ¥ Y Yet -Y19 Y ~ Yee Tax Exemption on Raw Materials Used In Manufacturing hy ¥ Y Y6 Y6 Y Y 4 Tax Incentive for Graation of Jobs % Y Y Y via 4 Y Tax Incentive for Industrial Invesiment y ¥ b iY, Y Y Tax Credits for Use of Specified State Produats Y20 Tax Stabilization Agreements for Specified Industries vi4 if Tax Exemption fo Encourage Re: h and Development y y Y Accelerated Depreciation of Industrial Equipment Y59 Y59 Y59 Y Y59 Source: Site Selection, October 1990, Notos: Y¥2 = An income tax credit (up to 50%) Is allowed lor a period of 10 years againal the Income taxes generated by the operation of A new business, The credit Is $100 per new amployee ovor two, plus $100 for each $100,000 of new capital investment, Inside a state- dosignated Enterprise Zone, tho credits aro accelerated to $360 per each new employee over two, plus $350 for each $100,000 of new capital invesiment. Y5 » Merchants’ and manufacturers’ inventories are exempt trom property taxes. jales/use tax exemption. tax exemption (local option in Oklahoma) on new industrial building. construction and expansions. using Act 9 bonds, Y19 = All Enterprise Zone now job credits are $25,00 per employwe ($5,000 for employees |n the aircralt industry). Non-Enterprise Zone new job credits can range from $100-$225 and are taken in lieu of the 10-year ad valorem tax exemption. ‘Y14 @ A gross production lax on texiile mills in lieu of property tax. 'Y17 = Enterprise program offers a $2,000 state income tax cradit per nat jab. '¥19 = Applicable to permanent or fixed property financed with industrial revenue bonds; applicable to machinery, equipment and certain other tangible property that |s exempted within a state designated Enterprise Zone Is businass qualifies tar job and investment credits. Sales taxes on manufacturing machinery and equipment have been eliminated, 20 = 7-your ad valorem tax éxemption on textile plants, Y21 = Applies In enterprise zones, ¥24 = Dolaware, Florida, Missouri, Nevada and New York do not collect an excise tax, Y25 = Nevada, South Dakota, Texas, Washington and Wyoming do not tax corporate or personal income, Connecticut, Florida and Now Hampshire do not tax personal Income. Y0 = City or county governing bodies may exempt all or any portion of buildings, land and associated tangible personal property used ‘exclusively by a businuss for (a) manufacturing, (b) conducting research and development, of (c) atoring goods or commodilles which are sold or traded |n Interstate commerce, Applies to expansions it new employment created, An exemption up to 10 years s allowed. Y32 = Allows full deduction of federal income tax paid trom taxable Income also. 34 « Exemption applicable to capital improvements only. ‘759 = Allows all federal exemptions and deduction of federal Income tax paid. In Kansas, taxpayer has the oplion to deduct federal income tax liability. ‘Y59 « Allowable depreciation is similar or identical to that permitted under federal laws. Y66 « Exempt I invantory destined for out of stato, 'Y82 = Phased In from 1990 through 1994.
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TABLE 3 Special Services for Industrial Development OK AK co Ks LA MO NM ™ State Financed Speculative Building Y Ya Y City and/or County Financed Speculative Building +e Y ¥3 Y6 Y Y20 ¥30 State Provides Free Land for Industry Y Cities and/or Counties Provide Free Y Y3 Y3 v3 Yul Y ¥3 Land for Industry State-Owned Industrial Park Sites Y Yes City and/or County-Owned Industrial Park Sites Y Y ¥ Y Y Y Y Y28 State Funds for City and/or County Development-Related Public Works Project Y22 Y Y > Y Y Y State Funds for City and/or County Master Plans Y i Y » State Funds for City and/or County Recreational Projects Y' vs Y Y Y ¥ i State Funds for Private Recreational! Projects ¥ State Program to Promote Research and Development Y Y Y Y Y Y y Yy State Program to Increase Export of Products Y vi Y 4 Y Y Y Y University A & D Facilities Available to Industry Y Y Y 7 y ¥' Y Y State and/or University Conduct Feasibility Studies to Attract or Assist New Industry Y ¥ Y Y Y Y Y Y State Supported Training of "Hard-Core” Unemployed ¥ Y Y Y y Y Y Y State Incentive to Industry to Train “Hard-Core" Unemployed Y Y y Y ¥ ¥ State Help in Bidding on Federal Procurement Contract *; Y Y Y Y , Y State Science and/or Technology Ad Council ¥ Yy v i Ad Y if Source: Site Selection, October 1990, Notos; Y2 = State allows cities or counties to offer financial aid for existing plant expansions, In Louisiana, state financing ald Is diractly involved only in the case of those port authorities whose port authorities whose obligations are backed by the full falth and credit of the Y3 « Provided only in rare instances, In California, Nevada and New Mexico, a few cilles and counties will lease land they own at nominal rates, Y6 » Carried out through local development corporations. Y7 = Available to industry on a contract and/or consulting basis, 20 = May be occasionally offered on a selactive and limited basis, Y22 = For industrial accoss roads only. Y25 = State-linanced research parks, In Utah, the state owns the University of Utah's research park. Y28 = Usually owned by nonprofit industrial corporations. Ya0« In Texas, rates are based on the number of jobs industry will create.
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That same debate does not seem as intense at the level of state policy formation, State govern: ments have changed their roles in regional eco- riomic development from largely passive observers and infrastructure providers to active partners with individual firms in the free enterprise sector, This transformation is characterized by the gen- eral observations below, Economie Development Changes. Eco. nomic development has changed from the activi- ties of “smokestack chasing” to 2 more sophisti- ented set of activities balancing business attraction, retention, formation and growth, “Managed Development.” The role of the atate in economic development, even if entrepre- neurial, is now seen as a cooperating or partner ship role where the public and private sectors work closely Logether for a common social objective, ‘The “correct social objective,” however, is not necessarily easy to formulate, justify or explain. ‘The working objective is frequently stated in terms such as job growth and relative per capita income improvement, and sometimes in more de- tailed objectives of some form of economic inno- vation, for example; ",,.encouraging small business start-ups and growth, technology development, and business modernization,”© 'Phe framework for judging appropriate gov- ernment intervention which is most widely ae- cepted by economists is that of nsing government to correct for private market failures of some sort, Failures are said to oceur when freely operating markets fail to provide for economic efficiency in channelling resources to uses which provide the most highly valued economic goods and services.” Familiar textbook examples of market failure in- clude impediments to the efficiant operation of markets, including shaved public goods, monopoly vlements in market structure, imperfect informa- tion on the part of market participants, exter- nalities, and environmental spill-overs, Whatever the fora of market failure thought to exist, government incentive programs should meet some realistic criteria for their justification. In a world of uncertainty, investment “mistakes,” when viewed with hindsight, are going to occur, The question is whether the public sector can im- prove upon the set of decisions made by the private sector in the absence of intervention, Incentive Programs. One must not, of course, jump from the presumption of market failure to the antidote of government intervention Without a great deal of thought. Econumic development incentives must be given to sound prospects for efficiency or produc Livity gains to be an effective tool for development, It is difficult to keep political considerations soparate (vom economic efficiency decisions, how- ever, The problems with “picking the winners" to award selective abatements, grants and subsidies is considered by some to be self-defeating. Such selective policies might lead to fower jobs created than would oceur with expenditures made directly by the nonsubsidized private firms, It is much more likely that general programs which tend to improve the economic environment for all firms will stimulate some growth without distortions, Programs with relatively little selec- tivity, like the general incentives of enterprize zones, specialized services for which firms pay al leaat some of the costs in user fees, and incentives with proven track records of effectiveness, are likely to be better received and supported by the general population. All of this, however, is complicated by the current almosphere of incentive negotiating in which organizations must predict the extent and form of competition and bidding that their deyel- opment. efforts will stimulate. Competitive give- aways by ull interested parties might simply lower the level of public services aynilable with no ine crease in the size of private investment nor any special attraction for a particular area, DIRECT EXPENDITURE PROGRAMS FOR ECONOMIC DEVELOPMENT 'The responsibility for implementing Okla- homa's economic development policies [alls to several state agencies working in cooperation with many private and community organizations. The Department of Commeree is considered the “lead agency” in this field, along with the group of lead- ors serving on the advisory board of Oklahoma Patures. The review of programs presented below, however, shows that they ure hardly alone in their efforts to stimulate the state's economy. What is presented hero is a description of se lected state, community and private sector pro- grams that constitute the special non-tax, non- finance programa for economic development. At, the state level these programs are organized as those offering education and training; research,
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technology transfer and information services; and facilities and infrastructure. International trade und investment services and the enterprize zone package are considered as additional special pro- grams. A very limited selection of community in- centives and assistance from the public utilities and community organizations concludes the sec- tion, State Edueation and Training Programs Training in Industry Program (TIP), One of the most widely acclaimed economic development incentives of the state of Oklahoma iy its custom- ized industrial training programs, especially those delivered through the state system of voentional- technical education.’ Nationally, such programs are offered by 44 states, making them the most common ron-tax incentive in current use. The Training in Industry Program provides customized training entirely free of charge for companies establishing new businesses in Okla- homa and as well as for companies expanding within the state. The range of activities provided by the pro- gram includes planning for the most productive type of training to offer, training facilities for the instruction, instructors from the offering agency or under contract from business, training manuals, on-the-job training, training equipment and other training aids, supplies and materials, and super- visor training. ‘NIP pays no wages but it does reimburse companies for training costs, The “preemploy- ment" training consists of 30-40 percent basic per- sonal skills that are components in programs for most firms whether manufacturers, processors or service firms, The following, “preproduction” training for people chosen for the payroll of the employing firm is more individualized and spe- cialized training for specific jobs. A summary of the TIP provided by the State Department of Vocational-Technical Education is in Table 4. Certainly the provisions of over 60,000 hours of instruction t@ 77 companies and 4,400 workers is a considerable incentive to hoth workers and employers. Competing states also provide customized in- dustrial training, with various kinds of programs and services offered, Table 6 illustrates primary program characteristics of Oklahoma and its TABLE 4 Training in Industry Program Statistics FY FY FY 1987-88 1988-89 1989-90 Companies Served 54 76 7 Hours of Instruction 55,300 62,016 60,374 Number Enrolled 2,869 3,850 4,976 Number Completed 1,942 3,447 4,398 Hours per Completed Trainee 29.5 18.0 13.7 neighbors, Oklahoma's system appears to be more extensive, and provides services to a larger number of firma than do Oklahoma's neighbors, The reader is cautioned, however, that different accounting systems, definitions, and treatment of overhoud expenses, make comparisons of cost in- formation difficult. Also, comparative data for program expenditures are incomplete, Job Training Partnership Act. The Okla- homa Business Taxation and Investment Guide describes the investment incentive of the Job Partnership Training Program (JTPA) as a 50 percent payment of on-the-job training costs and 100 porcent of classroom training “...for qualified low income individuals.” The operative phrase for program qualifiva- tion is “economically disadvantaged families and individuals who are faced with barriers to employ- ment.” Such barriers include workers thrown out of work from plant closings, school drop-outs, and those lacking baeie edvecational skills needed in current occupations. According to the latest ayailable annual re- port for Oklahoma: During program years 1988 and 1989, nearly 27,000 participants were served in the basic JTPA grant program. Of those, 18,932 completed the program and 18,700 found employment, ‘The average cost per adult participant who became employed was $2,887.60. Of the 11,179 youth served, over 4,366 successfully comploted the program at an average cost of $2,474.33, ‘The total dol- lars expended for the Program Years 1988 and 1989 was $81.957 million, Of these funds $77.86 million went. for direct services and $4.10 million for administration,®
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TABLE 5 Customized Industrial Training Program Program Training Expenses Paid Eligibility Volume Begun Administrator Characteristics to Company Arkansas Industrial 1969 VoTech Division of Pre-employment or Instructor time New or expand- FY 1988 Training Program State Board of OJT intensive training and materials ing manufacturing 42 companies Education for production industries 2,850 workers operation personnel Colorado First 1980 State Business Pre-employment or Instructor time, Only requires new 1989 Customized Industrial Development office and OJT materials and job creation 11 companies Program community college/ equipment $264,000 occupational educ. system Colorado Existing Industry 1989 State Business Job-specific Instructor time, Permanent, non- 1989 Training Program Development office and technical training for materials and seasonal 9 companies community college/ worker retention equipment non-retail sector jobs 558 jobs occupational educ. system retrained $250,000 Kansas Industrial na. Department of Commerce Pre-employed, OJT All negotiated Manufacturing, ware~ FY 1988 Training Program and State Dept. of and classroom costs housing, distribution 30 firms. Education and regional services 2,561 persons hiring 10 or more $1.5 million new employees Kansas Industrial 1988 Department of Commerce Pre-employed, OJT Shared-cost basis Restructuring No data Retraining Program and State Dept. of and classroom with industry industries, no other Education apparent restrictions Louisiana Industrial na. Office of Commerce and Pre-employment Company shares cost New and expanding 50 companies/ Start-up Training Industry and OJT of consumables, state manufacturing only, yr. pays most expenses min. 10 trainees 3,500 persons $1.0 million Missouri Customized na. Dept. of Economic Pre-employment, Company pays con- New and expanding na. Training Program and Dept. OJT and sumables. State pays manufacturing of Elem. & Sec. classroom most expenses. Industrial Education 50% wages of trainee and
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TABLE 5 (continued) Customized Industrial Training Program Program Training Expenses Paid Eligibility Volume Begun Administrator Characteristics to Company New Jobs Training na. Includes J.C. Districts Pre-employment, Company pays con- Apparently negotiable na. Program OJT and sumables. State pays classroom most expenses. 50% wages of trainee paid for OJT New Mexico Industrial 1972 Economic Development Classroom and Up to 1,040 hours New on expanding 19 companies Development Training Department of Labor, in-plant allowed, 50% cost manufacturer/producers $934,550 Program Junior Colleges reimbursement to and some non-retail (combined company businesses in service (programs) and : sectors. Rapid Response Training Use export or Program substitution criteria Oklahoma Customized na. State Department of Pre-employment, Program pays all New to the state, FY 1988 Industrial Training Vocational and classroom or OST industrial costs. expanding or changing 90 companies Technical Education No stipends paid to production methods. trainees. All firms eligible, emphasis on manufactur- ing and some services Texas Industrial na. Dept. of Commerce, Pre-employment Program reimburses New and expanding Sept. 88- Development Training Work Force Development classroom or on company costs manufacturing facilities July 1989 Division with Public site creating at least 10 jobs 30 companies Education system 3,712 trainees $1,268,191 ‘Source: NASDA, Directory of Incentives for Business investment and Development in the United States, 3ed Edition, 1991.
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Actual programs delivered in the various state regions are determined by individuals in the local communities but they generally fall into the following types of training activities: on-the-job training for eligible participants with fifty percent of wages paid by JTPA for the designated training time, job search training, classroom training (often combined with work experience or OJT), and various types of work experience for students, other youth and those facing employment difficul- Lies, In addition, 15 percent or more of the dollars are available for “.,.supportive services necessary to enable a person to participate in a training pro- gram,” 'Thia aspect of the program adds an ele- ment of social eervices to the employment enhane- ing aspects of job training. As an economic development tool, training funds can be combined with service delivery insti- tutions, especially public and private yocational- technical programs, and basic support payments to allow an individual some living expenses while obtaining training and skills that lead to produc- tive employment in a new or expanding establish- ment, JTPA is undoubtedly best known as a hu- man services program. But, when combined with other incentives and direct services, it can also become a way of enhancing the work force quality for business development, Research, Technology Transfer, and Information Services Oklahoma Bid Assistance Network!” The Oklahoma Bid Assistance Network was estab- lished in September, 1986, to assist state busi- nesses in the identification of, and successful bid- ding for, contracting opportunities within both the government and private sector markets, ‘The sya- tem operates through Bid Assistance Centers in 28 aren vocstional-technicul schools and receives ad- ditional financial support from the Department of Defense, the Oklahoma Department of Commerce, and JTPA funds distributed by local service areas, ‘The system connects firms to an electronic in- formation network which provides prospective bidders daily notices which list government agen- cies that are currently buying the goods or services produced by the firms, Each local center is supported by a State Cen- ter in Stillwater which maintains a technical in- formation and resource library as well as updates the electronic information network. The State Center also performa the system's administrative, coordinating and training functions, tt] Bid notices are entered in the system from bids published in the Commerce Business Daily and additional sources for purchases under $25,000. State of Oklahoma bid notices and other public and private sector opportunities are added to the electronic system, Procurement specialists at each canter worl directly with elient firms to provide technical as- sistance and training in marketing. Local person- nel provide interested contractors with additional technical assistance in locating subcontracting opportunities, in identifying researeh and devel- opment sources, construction and services con- tracting opportunities, in new product introdue- tion, and in developing quality assurance and in- spection systems. An additional service was formalized in Octo- ber, 1989, with the development of the Center for Aerospace Contracting to help secure additional contracts with ‘linker Air Force Base and other aircraft parts and maintenance employers, (‘These units include Tinker APB, American Airlines, Rockwell International, McDonnell Douglas, and the Vederal Aviation Administration.) This ser- vice targets small shops that once supplied many- factured goods to the oil industry, By March 1, 1991, 42 firms had participated in the aerospace project in which local firms were determined to be potential suppliers of almost 400 of 760 parts reviewed. Nearly 1900 bidding op- portunities ware identified and seven companios roceived 33 contracts from Tinker AFB ranging up to nearly $100,000 and totalling $490,000. Program reviews indicate that local personnel expect significant benefits from additional post- award bid analysis. A thorough knowledge of why a bid was unsuccessful is an important first step in adjusting expected profit margins, locating bet- tor sources of materials, linking with more auit- able subcontractors, or improving product quality, all of which might ineroase probabilities of suc- cessful future bidding. A second value-added service provided by the Bid Assistance Centors is specialized marketing assistance, especially fox international exporting of manufactured products. During 1989, 4 loval pilot project: provided marketing consultations with 75 new-to-export companies and 70 new-to-market firms. Under a 1991 reorganization, counsel was provided to 73 firms, and some efforts have been targeted in aup- port of the Tulsa Bid Assistance Center and firms alriving to sell manufactured aircraft spare parts
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to commercial manufacturing contractors in for- eign countries. The general performance statistics provided by the State Center for the Bid Assistance Net- work indicate an active client list of nearly 1,900 businesses, 94 percent of which are small busi- nesses. Through March, 1991, more than 3,400 Oklahoma businesses have utilized some degree of services from the network: in the successful bidding for 6,190 contracts netting nearly $1.0 billion in contracts, 68 percent being from the De- partment of Defenae, Costs of the services are os- timated to include about $900,000 of support fram the Department of Defense and $4,500,000 of Oklahoma state and local government sup- port. Real Extate Information System.l 'The Oklahoma Department of Commerce has estab- lished a Real Estate Information System (REIS) to assist in the marketing of the state’s business-re- lated real estate as an aid to economic develop- ment. ‘I'he system publishes a listing of available industrial facilities and building sites in the state, thus providing a centralized source of intra- and interstate comparative data for quick response to prospect inquiries, Information in the REIS comes in two forms. Fiyst, 6 brief computer-generated listing provides 4 building name and address, total square footage, ceiling height, rail accoss, doek high loading facil- ity, number of cranes (if any) and availability sta- tus. More detailed information is available on ouch listing regarding utilities, sale or lease price, site size, dimensions, zoning, office square footage, aprinkler and air conditioning deseriptions, num- ber of truck loading doors and contact procedures for the owner or agent. A listing complied in early August, 1991, contained in excess of 1,100 indus- trial building sites organized by region of the state, Oklahoma Center for the Advancement of Science and Technology (OCAST),!? ‘The Oklahoma Center for the Advancement of Science and Technology (OCAST) is a state agency created by the Economic Development Act of 1987 (HB, 1444) to promote science and technology in the state, and to stimulate the discovery, devolopmont and marketing of new products and processes in Oklahoma, Activities are authorized in support of: * Scientific research and development which generates new ideas, and converts them inte new products, W * The transfer of new technologies from re- search laboratories into the marketplace, * The successful marketing and application of new products, processes and services. The primary mission of OCAST has been implemented to this time through tive main re- search programs and a professional resource net- working service; * Centers of Excellence Program * Applied Research Program * Health Research Program * MOST Research Equipment Program * Small Business Innovation Research (SBIR) * Technical Resources Access Center (TRAC) The Centers of Excellence Program supports basic und applied research conters which combine the efforts of universities and colleges, non-profit yesearch organizations and industry, Instead of physical facilities, these centers coordinate re- search and deyelopment initiatives of a single, unifying theme by linking human and capital ra- sources from several sites from the academic, business and government communities of the state, (Regulations require two or mare Oklahoma institutions of higher education as well as busi- noss/industry partners before a Center may be ap- proved.) The Centers whieh are currently in operation are: the Center of Excellence in Molecular Meci- cine, the Center for Integrated Design and Manu /acturing, and the Center far Laver Development and Applications. The Applied Research Program supports col- lnborative projects involving Oklahoma institu. tions of higher education, private enterprises and non-profit research organizations which have the potential to develop marketable products, pro- cesses or services. Tts purpose is the acceleration of technology commercialization, with funding of one to three years of up to $100,000 annually on a one-to-one matching basis with non-state funds. The Health Research Program helps the state recruit and retain outstanding health research scientists Lo increase the competitiveness of Okla- homa researchers for national researeh funda. The program supports research investigating the cuuses, diagnosis, troatment and prevention of human diseases and disabilities, and facilitates the development of health care products and ser vices.
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Most projects in this program are for $25,000 to $20,000 annually for up to three years. Scien- tists being recruited to the state may apply for up to $75,000 to develop their research programs, No matching funds are required. The MOST Research Equipment Program as- aiste Oklahoma’s higher education inatitutiona in purchasing atate-of-the-art research equipment in areas where they have achieved, or have promise of attaining, a national standard of excellence. One-for-one matching funds must be provided by the applicant institution for projects generally coating $50,000 or more, The Smail Business Innovation Research (SBIR) Program is an incentive program for busi- nesses seeking research funds from the Federal Small Business Innovation Research grant pro- gram, Phase I of the SBIR program will reimburse small Oklahoma firms 60 percent (up to $3,000) of the costs involyed in developing a federal pro- posal in which the local firm seeks to help moet the R&D needs of federal agencies while talcing steps toward possible commercialization of new tech- nologies. Phase IL of the SBIR program provides se- lected firms, which haye won federal SBIR initial awards, matching money up to $25,000 to help with operational expenses for the 18 months or 40 between the first federal award and the submia- sion of federal Phase II proposals which could bring firms up to $500,000 in research support. ‘The program is seen as providing an incentive to submit federal proposals by providing gap financ- ing between the steps of the federal process. This new program provided three awards for $73,640 during FY 1990. The requested federal money in the three projects was $648,846. Finally, the Technical Resources Access Cen- ter (TRAC) awsists interested parties to locate and access the apecific in-state technical expertise re- quired for their development, objectives. he pro- iam is a computerized dotabase of 1,600 profiles of faculty from four of the state's higher education institutions, Additional faculty and experts from the private sector are being considered for the second phase of the program. At present, no charge is made for use of the system, Through June 1, 1991 OCAST awarded over $40 million dollars with « nearly equal amount matehed by non-state-appropriated sources. The agency had received over 1,260 applications and 12 made 441 awards. Seventy projects had been funded, in which 93 businesses participated. By program, the $79 million of commitments gener- ated by the OCAST programs ave distributed as follows; Centers of Excellence $30,496,889 (38.6%) Health Research $22,205,443 (28.0%) Applied Research $12,821,122 (16.2%) MOST Eminent Scholars § 8,585,750 (10.9%) MOST Research Equipment $4,993,638 ( 6.3%) Department of Commerce Site Selection Assistance, Companies considering a relocation or major plant investment in Oklahoma may re- ceive site solection services through two major di- visions of the Department of Commeree—the Business Recruitment Division for domestic com- panies and the International Division for foreign- based companies. Services are provided confiden- tially prior to location in the state as well as on a continuing basis over the longer-term, The first step in the process is communication with the recruitment specialists to determine building/site requirements plus other special needs such as work force training, transportation and utility services, financing assistance, ete. Next, a group of interrelated specialists develop an individualized unalysis of potential sites, includ- ing information on appropriate community incen- tives, as well as a detailed tax benefit, analysis in- corporating the incentive package. Ag firms arrive to yisit site locations, recruiters make arrange: ments and introductions while continuing to pro- vide information services ag additional inquiries arise. Long-term assistance for those firms that do choose to locate in Oklahoma is provided by the ongoing programs of the Business Development Division, Trucking Industry Self-Funded Research and Development. A 1987 picce of legislation known ad the Trucking Industry Self-funded Re- search and Development Act created an agency of that name (‘TISRAD) to utilize new revenues (rom licensing motor carriers and equipment ta conduct research “...on all facets of public and private strategy aimed at developing the state's trucking, warehousing, and distribution potential."19 In. terested readers may find a complete analysis of that program in the Oklahoma 2000, Inc. research report of 1989.
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Facilities and Infrastructure Industrial Access Road Program.4 The Industrial Access Road Program exists to assist local industrial de- velopment efforts by funding access facilities con- necting a specific company or industrial area di- rectly to the state or local road system. Such a road generally is one where the only justification for its construction or improvement ia the exist- ence of a viable industrial operation needing the transportation access, The current foundation for this program is an appropriation in the Transportation funding bill (HB 148, Section 4, 1991) which states that the department should use # minimum level of the particular fiscal year’s construction funding to en- courage local industrial development with access roads when various criteria can be established. Requests for funds must be submitted by a local unit of government having jurisdiction over the road, That unit must be willing to assume maintenance of the road following completion of a project since only authorization for construction is included in the legislation. Local participation is generally required when a project is proposed. Most often this comes in the form of city or county funding of grading and tlrainage, Access road funds are used only for sur- facing the road, typically with 3-4 inches of as- phalt. Any special construction, such as curbs and gutters, must be paid by local authorities. Right- ofway, including any utility adjustments, must be furnished at no cost to the department and, of course, must be available to the publie and cannot be on privately-owned land. ‘The economic development criteria of the leg- islation require that “the proposed access road must serve a new or expanding industry which will create a significant number of new johs and/or generate a significant capital expenditure in the construction of plant facilities.” To guarantee some degree of performance, whenever a new in- dustry is involyed a wrilten notice of commitment to lovate new facilities on a specific site and a timetable of construction must be on file with the project application at the Transportation Depart- ment. Most often the road construction is done along with initial construction of the private plant. facilities, Financial records for the program from 1978 through 1990 indicate that in most years the pro- gram éxpenditures are between $2 million and $3.5 million. In 1980 and 1986 expenditures ex- ceeded $6 million and in 1984 and 1987 they 13 dipped below the usual legislated amount of $2 million, Funds for fiscal year 1992 have been in- creased to $2.75 million,» Some measure of impact of this program was developed in the "INDUSTRIAL ACCESS ROAD PROGRAM REPORT: January 1, 1987 through September 11, 1990" developed for the Governor's Achievement Report, This accumulation of 88 projects involved programmed funding of $18 million, averaging $200,000 per project. An esti- mated 11,700 jobs were associated with these projects. Business Incubator Services, The inouba- tor concept is one of dedicated facilities designed to accelerate the development and success of start- up and young existing businesses, The range of services typically provided in Oklahoma incuba- tors include * affordable office and light industrial space * convenient, on-site support and office ser- vices * access to experts in management and busi- nese development * a limited slate income tax exemption * entrepreneurial skill-building programs, By count of programs, the state of Oklahoma yanks seventh nationally with 15 operating in- cubator facilities, two under development and approximately 10 communities studying the fea- sibility of sponsorship, !4 The statewide incubator industry is orga- nized through the Oklahorna Business Incubator Aasociation (OBIA) in McAlester, This voluntary association of managers, under the direction of a hoard of active incubator professionals and an ex- officio representative of the Department of Com- merce, meets quarterly to discuss common prob- lems, hear programs of mutual interest, and dis- cuss case histories of incubator tenants, The OBIA is associated with a national assa- ciation of the state associations, Members are particularly active encouraging economic deyelop- ment in rural Oklahoma, Discussions are being held with the state yocational-technical education department to develop additional information on what is needed ta make incubators a more effec- tive economic development tool and, especially, on what are the most important seryices to provida, Alternative methods of raising and distributing venture capital with particular emphasis on raral enterprises are alse being discussed,
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It is not clear that tax credit incentives in the state law are particularly important in generating new incubators or encouraging tenants beyond the implicit recognition of the objectives of the pro- gram as a goodwill gesture, The incubators and the OBIA provide a network of business and social relations which help new entrepreneurs under- stand and deal with unfamiliar risks and provide the ideas and information that is often lacking in first stages of business development. Statistical reports of incubator tenant growth and succeas often show small numbers of jobs generated at the sites, Practitioners feel that this is to be expected. In their view incubators are where new firms develop and test the initial prod- uct and posture themselves for growth that is likely to come after the firm has graduated and established its more permanent fucilities. A short statistical profile of the state’s 15 op- erating incubators reveals that. six of the incuba- tors are certified and eligible for state tax exemp- tiona; 22 businesses are located in the facilitios, most engaged in light manufacturing and services, with 103 tenant employees ranging from 1 to 13 per business. The Department of Commerce and OBIA are organizing a study for an evaluation of the state’s incubator program during the latter half of this fiscal year. Industrial Park Certification’? The Oklahoma Department of Commerce provides a yoluntary certification program so that “.,.pro- spective occupants can be assured of minimal quality characteristics, services and amenities that an Oklahoma industvial park will proyide."18 ‘The eligible applicants for the program are devel- opers whose industrial parks meet. at least the fol- lowing minimum requirements: (a) @ park must be zoned for industrial use, (b) utilities must be reasonably accessible, (ec) the community must have 4 governing board to oversee the park, (d) a preliminary plat must be prepared and approved, fe) the park must have a minimum of five acres, and (f apaved all-weather road to the site must be provided: Upon application and receipt of a statement of support by appropriate local aponsors, a certifying team inspects the area and certification dovu- ments are reviewed, [f successful a Certification u is issued by the Oklahoma Department of Com- merce and the designation is reviewed every three years thereafter, The parks cortified aa of full 1991 are shown below: Certilied Industrial Parks Location —Size/Acres Naw Horizons Park Ardmere 283 Ardmore Industrial Airpark Ardmore 2500 Barllesville Industrial Park Bartlesville 160 Central City Industrial Park Oklahoma Gly 55 Choctaw Business and Industrial Park Choctaw 49 E! Reno Industrial Park El Reno 50 Eutaula Industrial Park Eulaula 53 Henshaw Industral Park Broken Arrow = 120 Henshaw Industrial Park South Broken Arrow 55 Old Airport Industrial Park Lawton 10 North Tulsa Industrial Park Tulsa 60 H.C, Sullivan industrial Park Seminole 90 Adwan Industrial Park Seminole 40 Sulphur Industrial Park Sulphur 48 Tinker Business & Industrial Park Midwest City 62 Woodward Industelal Park Woodward 720 A parallel effort at certifying industrial parks has been underlakan by Oklahoma Gas and Elee- trie Company, While the criteria and procedures differ, the basic objective of providing information on minimal standards to prospective tenants is the same. International Activity Support Services International Development. Investinent in Oldahoma by foreign firms and exporting to in- ternational markets are lwo ways to create and retain jobs that must take their places along with traditional efforts to recruit firms from, and ¢x~ pand markets in, the rest of the fifty states. The mission developed by the Oklahoma De- partment of Commerce for its International Divi sion “.,.i8 to assist primarily small and mediam- sized Oklahoma manufacturers and service firms to export for the first time or to expand interna- tional markets by providing export marketing in- formation, assistance and consulting services, and through promotion of Oklahoma products and ser- vices in foreign markets. The Division also has the responsibility to assist and guide state, regional and local economic development corporations, committees and chambers of commerce in identi- fying und attracting foreign manufacturers, pro- ducers and distributors into the state,"
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‘The state's export promotion activities are de- livered through a unit of the Department of Com- meree called Oklahoma International Export Ser- vices (OIES). This unit combines the personnel and resources of the state DOC and the federal government's program through the U.S. Foreign and Commercial Servioe, International Trade Ad- ministration, The principal activity of OILS is the provision of services to exporters including: * Export education and assistance workshops * Country market/industry sector seminars * Oversens trade promotional events * Individual and single firm counseling sessions * Export trade promotion * Coordination and networking of external ex- port resources: ‘The extent of international promotion activi- ties can be gauged by the unit's listing of export promotion and development activities over the pe- riod of FY 1984 to FY 1990; * 13,409 export counseling sessions * 1,828 U.S, export regulatory controla coun- seling sessions 253 export workshops, seminars and confer ences $100 million in export sales reported by com- panies receiving export counseling = 12 overseas export promotion eyents/catalog video shows (since FY 1987) * 185 participants in catalog video shows * 3,248 trade leads for participants of catalog video shows * 603 instances of specific marketing assix- tance program use for locating agents and distributors, determining bonafide potential buyers, advertising products internation- ally, or providing export contact lists * 84 monthly newsletters with a distribution list of 3,200 * 26 major seminars and conferences by coun- try/industry sector While the listing consists of input measures rather than outcomes, it dows show considerable accep- tance and usage of services by the private sector engaged in internationally exporting, A group of business leaders und other inter- cated professionals meet regularly in an advisory 16 capacity a8 a District Export Council to provide sruidance to the Governor and Director of the De- partment of Commerce for policies in the export promotion field, A Governor's International De- velopment Team provides a counterpart advisory group for reverse investment and oversight of Oklahoma's foreign offices. Through these bodies and several task foreea that have existed over the decade, mechanisms exist for input into operations of this economic development program, Foreign Trade Zones. A Foreign Trade Zone is a very specialized tool of economic devel- opment. that has relevance and benefit to a few types of businesses using imported components in products for domestic use or re-export that require some modification or assembly. The traditional benefits of the foreign trade zones include; (a) ayoidance of customs duties (taxes paid on imported items only) on items re-exported, including the ability to ayoid duties entirely on broken, damaged or returned items not usable in the assembly process, (b) deferral of both tariffs and domestic taxes until imported merchandize leaves the trade zone, (c) use of the zone to store goods before paying duties until time for a seasonal demand (o.g.,Christmas inventory) of until quota rights can be issued—that 18, for logistical advantages of better timing of deliveries and to guarantee a foreign producer's abil- ity to deliver goods properly for “just in time” inventory systems, The newest of the advantages of the FTZs al- lows firms to avoid inverted tariffe—a situation that arises when the duty on the finished good, say the assembled automobile, is lower than the rate on imported components, perhaps an engine, drive train or radio system, By applying for subzone status and acquiring all the rights of an PTZ, the automobile assembler can avoid paying the higher duty on the imported components by waiting and paying the lower rate applicable to the assembled automobile on the accumulated value of the im- ported components. The use of these zones to defer or reduce tariff payments is, as one would expect, a controversial policy, The national administration has tried to allow subzones for situations that reault as a by- product of years of trade negotiations, such as the situation in the automobile industry, and deny
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access to a means of avoiding inverted tariffs due 10 conscious Congressional policy, such as occurs in bicyele and television manufacturing. More Congressional Hearings will undoubtedly be scheduled un these issues in the future, Oklahoma has three foreign trade zones; one at the Will Rogers Airport in Oklahoma City, an- other at the Port of Catoosa near Tulsa, and third at the Port of Muskogee. Foreign Trade Zone 106 in Oklahoma City 18 includes 866 acres at the Will Rogers Interna- tional Airport, a warehouse at 2601 Melcat Drive in Lakeside Business Park and six acres nearby for construction of additional warehousing facili- ties. ‘The main activity of the Oklahoma City For- cign Trade Zone is orgunized around three eperat- ing programs and the information services, coun- seling and training provided by the sone staff, The programs include warehousing, land development and subgone sponsorship, A private company, Meridian International Services, Inc,, has contracted to manage a 106,000 square foot warehouse with associated import/ex- port automated inyentory and computer docu. mentation programa within 1.5 miles of the air cargo facilities at Will Rogers, Facilities of this type are physically similar to traditional bonded warehouses used i international trade, however, their presence in a foreign trade zone provides additional technical advantages of value to certain types of importing and manufacturing businesses, The lund development program provides for the lease of land on sites near the airport to es- tablish light manufacturing or assembly facilities for those intent on utilizing the benefits of the zone program. ‘Two hundred thirty-six areas are cur- rently available in thie program for lenses up to fifty years in duration. Finally, the staff of this zone is available to holp larger manufacturing and assembly firms apply for subgone status at the physica! location of their existing facilities in order to secure certain rights and privileges of the full foreign trade zone with fewer complications in the application pro- ceas, Currently the General Motors subzone at the site of ita Oklahoma City assembly plant is the only one located in the state, The Foreign ‘rade zones authorized at the Port of Catoosa and the Port of Muskogee are cur- rently inactive. Enterprise Zones2" Wntorprise cones are perhaps most logivally thought of as “location-spe- cific tax abatements."2! Thwy are general rather than specific tax abatements because their ineer tives are available to any qualifying company without governments having “to pick the winners" or otherwise make decisions on inadequate data jnown only to the private sector owners, Second, unlike specific tax abatements that might not have a particular rationale for the chosen companies, enterprise zone tax abatements can legitimately be seen as a coat-reducing offset to a reduced quantity or lower quality of public services in the zone, Thus, enterpriaé zones can be justified as 4 tool of economic development if designed and uti- lized reaponsibly, The “Oklahoma Baterprise Zane Act” of 1983 and later amendments through House Bill 1759 passed in the 1991 Legislature defines an “enter- prike zone” as either a county or an area within the corporate limits of a community which meet speci- fied criteria. Acounty may be designated as such 4 zone if it (a) hasan average unemployment rate of over one and one-half times the state average for a twelve-month period as determined by the Oklahoma Department of Com- meree based on data from the Oklahoma Employment Security Commission, ov (b) cis designated aa a labor surplus avea by the United States Secretary of Labor... or (ce) has for three consecutive months or more a fifty percent or greater increase over ita average vnemployment rate for the previ- ona calendar year..; provided suid increase resulta in an unemployment rate that ex- ceads the state average unemployment rate for the previous calendar year, or (d) those counties that have an unemploy- ment rate that excceds the state average unemployment vate for a twelve-month period ,..and 4 net population out-migra- tion of four percent or greater for the pe- riod of 1980 to 1988 aa determined by the Department of Commerce, or (e) those counties that have an ayerage popu- lation decrease of ten percent or greater between the lateat two decennial censuses, As of September 1991, twenty-four counties wore designated us enterprize zones in the state of Oklahoma, Seven countries satisfied criteria (a) with high unemployment; 4 counties satisfied (d)
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with high recent out-migration; 2 counties satis- fied (ce) With rapid increases in unemployment; and, 16 counties satisfied (#) with at least 10% population losses between census counts, Feder- ally determined labor surplus areas were not yet announced, An area within or contiguous to the corporate limits of any city or town of this state which the Oklahoma Department of Commerce approves, upon application, may be designated aa an area of economic distress using guidelines which include the fact that a majority of the households within the specified area have an income of less than eighty percent of the median income of this state, As of October 1991, forty-six cities had one ar more enterprise zones designated within or adja+ cont to their city limits, Only the larger cities had multiple zones and none had more than three zones so identified. The specific incentives provided by the Okla- homa enterprise zone law include; (a) Two times the amount of the investment tax credits as provided in Section 2357.4 of ‘Title 68 of the Oklahoma Statutes, and (b) Low interest loans from an enterprise district loan fund as provided in the Bn- terprise Zone Act for a period of five years following the date of designation ag an enterpriae zone or until an area no longer qualifies as a zone. Unfortunately, since the gtate has no fonds available specifically for enterprise zone inyesl- ments, two other sources of funds are advertised for zone application, First, zone investors are en- couraged to make use of the smal! business and agricultural linked-deposit loan programs devel- oped for general (nonzone) economic development objectives, Second, the possibility exists for three to six contiguous enterprise zones to form 4 coop- erative “enterprise district” and sell general obli- gation bonds of the local counties, cities or towns for lending to qualified investors. 'l'o date, no auch bonds have been sold for this purpose. More recently, the law has been amended to allow a designation for targeted industrial ureas within a county and/or portion of a community as a priority enterprise zone, These criteria generally relate to a median income less than 40 percent of the state’s median household income in the last census, an area With less than 20,000 population, an unemployment rate 25 percent higher than the state average, out-migration of at least 5 percent 17 in the last five years, and evidence of a plan and commitment for development by local authorities, When applicable, a few additional benefits can be received, Because of the advantages of this type of in- centive there appears to be growing interest at both the federal and atate levels, A review of pro- grams in the neighboring states (as summarized by the National Association of State Development Agencies) reveals that all have programs with the exception of New Mexico. The nature of incen- tives, eligibility criteria and the number of desig: nated areas all vary widely, Most, however, ap- pear to offer a wider variety of incentives for job creation and major inyestments than Okla- homa.22 Local Area Economic Development Incentives Communities and substate regional organi- zations algo provide economic development incen- tives, Table 6, reproduced from Site Selection , illustrates the range of incentives advertized for selected Oklahoma political entities. Local chambers of commerce, regional devel- opment organizations, and other special purpose groups, form the front line of contact with busi- nesses considering expansion or relocation, Gen- erally speaking, they do prepatory research, write proposals, arrange lours of sites and facilities, and frequently add locally authorized incentives as they package and sell available incentives trom other sources, The types of local incentives that appear to be most common in Oklahoma are froe or reduced- cost land, additional financing and special ser- vices, With the stute constitutionally prohibited from providing free land to potential investors, lo- cal governments have generally found ways to provide land for business investment, often through local industria] foundations or industrial parks, at roduced cost. Cases exiat where land was given away; sold at a subsidy of, say, two acres for the price of one; or, provided with an economical long-term lease, These incentives are often mixed With other services provided by industrial parks, and perhaps incubator and training services pro- vided close by. A second main area of local competition is the area of additional or incremental financing, Com- munities can provide for industria] development bond issues under conditions controlled by atate
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gt TABLE 6 City and County Business Investment Incentives Cleveland Oklahoma Washington Ardmore County Ounean Edmond Enid County Okmulgee Tulsa County Tax Incentives Tax Exemption or Moratorium on Land, Capital Improvements Y ¥ ¥ Y Y Y Y Tax Exemption or Moratorium on. Equipment, Machinery Y Y Y Y Y Y ¥' Inventory Tax Exemption on Goods in Transit (Freeport) Y Y Y ¥ Y Y Y Y Y Tax Exemption on Manufacturer's Inventories Y Y Y Y Y Sales/Use Tax Exemption on New Equipment ¥ Y Y Y ¥ % y Tax Increment Financing Y Y Financing Programs Revenue Bond Financing Y Y Y ¥ i v ¥ Y General Obligation Bond Financing Y bs Y Y Y Loans for Building Construction ¥ yf Y Y Y 4 Equipment, Machinery Loans Y Y Y Y Y Y ‘Seed or Venture Capital Y Y Y Special Inducements Publicly Owned Industrial Park Sites y Y Y ¥ Y Publicly Provided Industrial Sites Below Cost Y y % % Publicly Provided Industrial Access Roads Below Cost Y Y Y Y Y + Y Y Publicly Provided Services? Y ¥ Y Y ¥ Source: Site Selection, October 1990.
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law and they can negotiate for private lending ata cost below commercial rates from credit agencies or public utility funds, Recent examples also indi- cate the occasional willingness of communities to add sales taxes to generate a fund to entice a business relocation. At the least, local developers monitor special funding opportunities like the State’s linked-deposit. financing or use of oil over- charge moneys for energy conservation and, in other ways try to help individual companies de- velop their proposals for whateyor funding is available at reduced cost, Finally, at this grass roots level, ingenuity and flexibility cam be merged in new ways aa ope portunities arise. Relocation assistance, for ex- ample, is often personally provided by local vol- unteers who show housing and help find jobs for spouses. Moving expenses might be paid for key executives, and a truck driver training school may move a company to combine trainee experience and community inducement, Private Sector Support Public Utilities, One sector of the economy which has been exceptionally active in supporting state and community economic development ef- forta ia the group of public utilities, In Oklahoma, programe and/or incentives are offered by Oklahoma Gas and Electric Oklahoma Natural Gag Public Service of Oklahoma Southwestern Bell Telephone Company Rural Electric Cooperativas Western Farmers Electric KAMO Electric, The nature of economic development efforts offered by the utility sector was recently high- lighted in an advertising aupplement in Forbes magavine.24 Utilities’ historical knowledge of particular areas and inhabitants allows them to provide yaluable informational services. Some companies have loan programs for construction, but more are inclined {» offer some form of incen- tive vates for marginal energy use and stress low basie rates, and services to help companies imple- ment new cost-saving technologies and equip- ment, At the community level, many utilities help conduct ongineering and feasibility studies needed to develop industrial parks, sponaor national ad- vertising and direct mail campaigns for regional business recruitment and, perhaps most impor- 19 tantly, supports local programs for business re~ tention, Business Roundtable, The Oklahoma Busi- ness Roundtable®4 is a recently formed private panel of COs or Presidents of state companies who have committed $135,000 for an initial slate of activities including support of “...reeeptions, meetings, seminars and other national and inter- national activities that are essential to business recruitment,” Roundtable President Donald Paulsen, former Oklahoma Secretary of Com- merce and Director of the Department of Com- merea, reported plans for hosting “six or eight site selectors, the people generally on the Bast and West Coasts that work with the large companies to identify locations for new operations and new manufacturing plants.” Other activities include support of business recruitment in Los Angeles, and the state's foreign offices, especially the new Suropean office in Frankfurt, Germany, RECENT DEVELOPMENTS IN INCENTIVE LEGISLATION The 1991 State Legislature added several pieces to the stute’s incentive package in the areas of food processing, recycling, aircraft, economic innovations, information services, and financing. The last two are covered in the chapter by Holmes in this volume, Food Processing An attempt to encourage further food indus- try development was contained in legislation (8B 518) that would allow certain agricultural activi- ties by large commercial corporations engaged in swine or poultry operations. Oklahoma's law regarding corporate farming generally prohibits all foreign corporations from engaging in farming and ranching and in either land ownership or leasing for that purpose, Do- mestic corporations ave generally allowed for “family farms” in whieh the majority (at least 65 percent) of corporate income is agriculturally-re- lated and no more than 10 shareholders are in- volved unless they are related by birth or mar- riage. (Parenthetically, the 1991 act did increase the allowable number of shareholders to 26 for corporations formed for breeding horses!| The 1991 legislature amended the corporate farming Jaw to exempt either foreign or domes: tic corporations from state restrictions when the
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corporation “engages in poultry and/or swine op- erations, including only directly related opera- tions, such aa operating hatcheries, facilities for the production of breeding atock, feed mills, pro- cessing facilities, and providing supervisory, technival, and other assistance to any persons performing such services on behalf of the carpo- ration... Evidently the door has been opened for corpo- rate “confinement production" and vertically inte- grated processing of these farm animals, Only political considerations would seem to explain why this deregulation is so limited. Reoycling Several pievos of legislation dealt with ineen- tives for waste disposal and industry development of reeyelables, House Bill 1640, the Oklahoma Waste ‘Tire Reeyeling Act, allowed for the use of an indemnity fund to pay waste tire facilities up to 50 cents for processing any tive discarded in Oklahoma, pro- vided that 26 percent of the tires processed were collected from designated dumps, An additional 35 cents per tire can be paid for atatewide collec- tion of tires from dealers with 1,000 discarded Lives per site to clean ap, Tire processing: must result in particles less than four square inches for wse in recycling, reuse or energy recovery to qualify for payments. House Bill 1940 containing legislation known as the “Manufacturer Recycling Incentive Act” was evidently legislation drafted for immediate application to Fort Howard Paper Company's ap- plication for expansion of its Muskogee plant but its provisions obviously become available to any qualifying business. This logislation allows an income tax credit of 15 percent of the investment cost of a recycling facility, ‘I'o qualify, the finished products of the manufacturing industry must be composed of at least 90 percent of recyclable materials, ‘The lim- iting features of the law provide that the credit shall be ayailable only if the total cost of the fae cility exceeds $10 million, and the combined cost of conatruction material, machinery, equipment and other tangible personal property exceeds $50 million. Note, however, that later language states that "The Oklahoma Tax Commission and the Depart- ment of Commerce shall inform manufacturing and processing industries, both within and outside the state, of this tax credit benefit, nnd in every 20 way possible gain the most favorable publicity and increased activity for Oklahoma resulting from thia act.” This would seem to imply an expectation of broader use than a single industry, The Oklahoma Solid Waste Management Act does serve some notice that out-of-state waste management is considered to be a public issue. Previous law imposed a fee for use of waste dis- posal sites, sludge land application sites or comt- mercia) biomedical waste facilities if the waste ia generated outside of Oklahoma, Economic Innovations Senate Bill 337 (1991) relieved the Depart ment of Commerce of its “,,.power and duty to de- velop and manage an Economic Innovation Sys- tem.” Instead, the new legislation (under title of the “Economic Innovation Development Act") charged the department to establish "...a com- petitive process to encourage local economic de- velopment activities by public and private sector organizations in cooperation with the Department of Commerce's statewide economic development efforts.” The heart of the program is the charge to the Department of Commerce to contract for services with local economie development organizations servicing more than a single community and able to match state dollars with other public or private support, Such organizations must submit viable economic development action plans for an ensuing fiaeal yeur and request reimbursement for only allowable expenditures approved as in the budget work plan. The legislative intent is evidently to replace the current Beonomic Innovation Network (EIN) of publicprivate partnerships with a new ap- proach to stimulating innovations, Information Services The development and dissemination of statis- tical data for policy analysis and program evalua- tion was addressed in House Bill 1444. It called for the development of a statewide electronic data network (ORIGINS) that could be utilized by com- puter sofware inexpensively from anywhere in the state, That system has been developed and other forms of information dissemination are also being authorized, The following two programs are examples of this activity, Senate Bill 109 amends the OCAST legisla- tion to authorize expenditures for meetings and
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conferences relating to economic development and science and technology issues. Also, the Oklahoma Capital Investment Board has been approved to cooperate with the Department of Commerce's Capital Resources In- stitute to provide seminars on “the techniques of identifying and packaging venture stage projects” for economic develapment professionals and incu- bator managers. More generally, the staff of the OCIB offer tevhnical assistance to entrepreneurial companies in the preparation of plans, reports and presentations seeking equity capital from various sources. A SURVEY OF ECONOMIC DEVELOPMENT PRACTITIONERS An indication of perceptions held by the state's economic development professionals re- garding the importance of various incentives, and the interstate competitiveness of Oklahoma's in- centivea, can be gleaned from a survey conducted during early fall of 191,26 According to the responses summarized in Table 7, the most important incentive in the Oklahoma arsenal was the state's customized in- dustrial training, with its free instruction for por tential employees of new and expanding busi- nesses, ‘The five-year exemption on ad valorem taxes and industrial park availability tied in the ratings as the second most important incentives, These programs were followed by equal ratings given to income tax credits for news jobs and in- veatment, and the salea tax exemption for new manufacturing. Sixth in the ranking was the in- dustrial road access program, Perhaps not surprisingly, the top ten incen- tives Lhought Lo stimulate economic development mix the common elements of technical training, tax incentives, and assistance in arvanging fi- naneing. Infrastructure developments, give-n- ways, the most Specialized programs, and infor- mation services, appear to be generally perceived as relatively less etrategic in the overall scheme of business development incentives, Yet, they do seem important enough to make some difference when circumstances are otherwise favorable. Enough surveys were returned to get an in- kling of perceptions about inturstate competitive- ness for only two states—Texas and Arkansas. These returns, as seen in able 7, confirmed the writer's impressions from personal interviews and al the general business press that Oklahoma's in- centives are equal or superior to those of the sur+ rounding states, Questions regarding incentives that develop- ment professionals would like to either improve or control were answered by just over half of the re- spondents, The most notable aspect of thia invita- tion to comment was the extremely broad range of suggestions—over twenty in all, The two most common suggestions for improvements related to the customized industrial training and to some aspect of financing. Extensions of the ad valorem tax abatement to eithor increase the number of years or the types of industries that would qualify were also mentioned by a few practitioners, Be- yond that, almost the whole range of incentives listed in Table 7 showed up on at least one person's list as an item to improve, On the other side of the incentive issue, few Oklahoma practitioners went so far as to identify specific incentives to control or regulate. Many mentioned the general displeasure with the com- petition of "give-aways" and the drain on the tax base. A few individuals spovifically mentioned their disagreement with local units that compete by giving away or subsidizing land for commercial use, Some also stated disagreement with indi- Vidual businesses disclosing bide already laid on the table and negotiating specific inducements like moving expenses for executives, or outright gifts not tied to performance mexsures. Overall, how- ever, this group appeared willing to argue for con- tinuation, and even enhancement, of the tradi- tional incentives of training, tax abatement, fi- nancing, and infrastructure development. Tn a much more formal way, apparent satis- faction with the state's incentive package was forcefully expressed in the “Report of the Okla- homa Muture's Reonomic Development Incentives ‘ask Force” by Chairman Clyde C. Cole, Chair- man, on September 1989. The report and recommendations of the 33 listed members of the Task Force are briefly sam- marized below: 1, During the past several years, the Okla- homa Legislature has been especially sup- portive of legislation designed to stimulate and support the economic development ef forts of our State. 2, Our Task Force met on several occasions, We have had a thorough discussion of Okla- homa's economic development incentives,
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and based upon these deliberations we find that there are no major additions to our state’s economic development incentives package that are required at this time. In order to maintain our competitive situa- tion, it may be necessary, in the future, to pursue other economic development incen- tive possibilities, At this time, we believe it to be imperative that any proposal include a cost/benefit analysis. This will be extremely important in securing legislative support. TABLE 7 We are convinced that the most effective in- centives that can now be added to our “eco- nomic development package” would be an upgrading of Oklahoma’s education system and meaningful worker's compensation re- form. In our opinion, the inadequacies of our education system, both higher and com- mon, and the deficiencies in our workers’ compensation system are major deterrents to economic development efforts. Importance and Effectiveness of Oklahoma's Economic Development Incentives Oklahoma Incentive Importance Score Compared with 6 = most important Texas Arkansas Ne24 neh Nw57 1. Industrial Finance Authority loans? 3.8 E E 2. Industrial Revenue and Genaral Obligation bond financing? 3.8 E B 3, Small Business linkad-deposit loans? 3.0 B 8 4, State Export Financing assistance? 31 8B 8 5, Income tax credit for iInvestment/new jobs? 46 B BB 6, Sales tax exemption for manufacturing investment 45 B E 7. Income tax credit for recycling firms? 34 B E 6, Small business incubator tax bonelits? 29 E E/B 9, 5-year ad valorem tax exemption on qualilied property? 4.6 B E 10, Customized Industrial employee training? 4.8 B 5 11. Bid Assistance Centers for federal procurement? 3.2 B 8 12. Industrial Access Road funding? 4.3 B E 13, Research & Development support (OCAST)? 2.9 E EBB 14. Export Marketing Assistance? 3.0 E 8 15, Commerce Department Site evaluation 3.0 E E assistance? 16. Enterprise Zone benolits? a5 E E 17, Small Business Management Development Services? a2 E E 18, Land given free or at a discount? 3.3 E Ww 19, Stale school land leasing up to 55 years 24 B Ww 20, Industrial Park availability? 46 E 8 21. Community Davelopment Block Grants 39 1 E Notes: Importance Score based on 5 responses with Saassential for favorable decision to t«raraly Iimporlant. Rasponse reported for state comparisons is most frequent af Better, Worse, or Equivalent, 22
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ISSUES POTENTIALLY IMPACTING FUTURE LEGISLATION Despite the apparent high degree of satisfac tion with Oklahoma’s incentive package, there re- maine the ever-present need for continual aasess- ment of existing legislation and consideration of selected issues of relative current interest and importance, This section concentrates on a few selected issues for policy analysis. Industrial coverage One basic issue of any incentive package is al- ways the proper definition of coverage—what businesses, industries or perhaps classes of own- era qualify to receive the special inducements? The typical minimal anéwer appears to be the manufacturing industries as defined in the U.S. Standard Industrial Classification, Owners and workers in other sectors of the economy, and eco- nomic development professionals, often argue that this is too restrictive, They say that the argue ments that justify incentives for manufacturing apply with equal justification in other areas pro- ducing for export beyond the region to national and international markets. Technical language was drafted and debated during the last legislative session to extend the in- dustrial coverage of the state's incentives related to abatement of sales taxes, income taxes and ad valorem taxes—House Bill 1657, That bill was not heard in committee but is evidently alive for dis- cussion in the 1992 legislative session, Current, legislation affecting each of these taxes is primarily targeted at new or expanding manufacturing plants or facilities, Thig bill would broaden the base for tax abatement incentives by adding industries beyond the traditional SIC manufacturing codes 20 through 39 to include business service establishments classified as com- puter services and data processing under the fol- lowing codes: SIC 7871 Computer Programming Services SIC 7372 Prepackuged Software SIC 7378 Computer Integrated Systems Design SIC 7874 Computer Processing and Data Preparation and Processing Services SIC 7375 Information Retrieval Services, However, the act, would not cover such services as Computer Facilities Management Services, Cam- 23 puter Rental and Leasing, Computer Maintenance and Repair and Computer Related Services, Not Elsewhere Specified which are included in this chapter of the Codo, Analysis of the detailed SIC definitions ro- veals that the proposed industries appear to he inclusive of the higher-gkill vocations involyed in the computer programming and applications area, whereas the uncoyered industries related to facil- ity management and the processes of renting, leasing, repairing or maintaining equipment, The recommendation of this bill would also expand coverage to include establishments en- gaged primarily in research and development as defined below: SIC 8731 Commercial Physical and Biological Research Commercial Economic, Sociological, and Educational Research Noncommorcial Research Organiza- tiona SIC 8734 Testing Laboratories, Im this case the entire three digit grouping of “Research, Deyelopment and ‘Testing Services" is Included in the proposed additions. Establishments meeting the genera) criteria of R&D work are classified in the SIC Manual as sither commercial or noncommercial, and, for the commercial establishments, as those related to physical and biological processes versus the busi- ness, social and economic processes, In all cases, however, the industries are perceived to be closely tied to high-technology industries, ‘The expectation that the majority of sales be to out-of-state buyers is codified in language such as the requirement that a qualifying establish- ment must “,..derive at least fifty percent of its annual groaa revenues from the sale of a product or service to an out-of-state buyer or consumer.” The rationale for special treatment of manu- facturing industries deriving from an export-base theory of regional economic development has long been accepted by many development profession- als, Evidence for treating the service activities as an equally important component of a regions ex- port-base was recently published in the Oklahoma Business Bulletin. That study did show that the products of several service industries are highly exportable and that Oklahoma currently holds re- gional comparative advantage in very few of these services. SIC 8732 SIC 8733
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Regional Cooperation for Incremental Financing A second igsue concerns the authority and flexibility of loval political units to determine tar- geted incentive packages for prajucts with par- ticular loca! support. One of these techniques is incremental financing using a dedicated local tax increase for a particular length of time. The out- line of such a measure proposed in the Oklahoma legislature is addressed below, A bill introduced into the 1991 legislature as House Bill 1525 would address loval area economic development incentives by encouraging local for- mation of areas such as enterprise ¢ones, histori- cal preservation areas, conservation areas and apecially defined concept of an “economic growth area” to be determined by local governing bodies desiring to enhance economic development, Dis- tricts formed to pursue development, goals would be limited to land areas under 25 percent of the area of the political subdivision and have an as sessed value under 16 percent of the region's total 80 as to limit any tax revenue losses. ‘These development districts would be encour- aged to form development plans and goals which would ultimately increase the tax base of the city, town or county, Implementation of an approved plan could then proceed with various tax incen- Lives or exemptions, tax increment bonds for rais- ing capital, or use of other economic devices as delineated in the draft logislation, The nature of limitations imposed on the abil- ity to grant incentives would, for example, (a) re- strict ad valorem exemptions oy incentives “..only to the extent of new investment mude;” (b) not al- low such exemptions if a project was financed by tax increment bonds or if the property already benefits from the constitutionally allowed exemp- tions; and (c) limit exemptions in time to, say, five years or, in the case of enterprise zones, to six years. The new incentive structure for project fi- nancing that is outlined within the draft is known ag “tax increment financing.” Basically, a taxing unit can define a certain base level of rated and assessed valuation and then adopt an increased portion of ad valorem taxes to be paid into a spe- cial fund to repay interest and principal on funds raised to implement the project plan, New autho- rization is evidently needed to protect the right of the (axing unit to make the desired divisions of funds for a specified poriud (8 years was suggested 24 in the draft), and outline requirements for altering the laxing scheme to protect. the incremental project repayments, The legislation would exempt tax increment bonds and resulting income from all state and lo- cal taxes, and usually limit the maximum period of time for repayment (25 year's was used in the draft), Such bonds could not be general obliga- tions of the taxing unit and should not be included when determining debt obligations of the city, town or county, Incentive Controls, Competitive Giveaways and “Clawbacks" One analyst has recently characterized incen- tive packages as “..economic steroids—in the short rin, they strengthen communities in the race for new plants and expanded payrolls."29 Not surprisingly, many are suggesting that incen- tive bidding is getting out of control and some regulation and controls must be adopted to ensure “fair competition.” Incentive packages are limited to certain types of firms, locations and/or activities, As such, they differ from other types of economic develop- ment programs affecting infrastructure, levels of education and other aspects of the business envi- ronment, These differences give rise to the main objections that have been raised agninst subsidies seen a6 “giveaways” by those nol qualified to par- ticipate or those paying the bills.2° Some of the arguments follow: 1. Because of the selectivity of the incen- tives, they are frequently allocated in a political environment—ugually to the larger, more visible projects, In many cases the expenditure criteria are seen as ad hoo, favoring visible high-tech projects, or open to political presaures oy other manipulations. Some ques- tion whether the expenditures “crowd out" investments that would haye been undertaken by other local firms not qualifying for the subsidies, 2. Incentives, whether direct subsidies or tax breaks, represent lost government revenues that could be spent more broadly on programs benefitting a broader array of local industries, Money spent or not collected is not available for enhancing the general
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Regional Cooperation for Incremental Financing A second issue concerns the authority and flexibility of local political units to determine tar- geted incentive packages for projects with par- ticular local support. One of these techniques is incremental financing using o dedicated local tax increase for a particular length of time, The out- line of such a meagure proposed in the Oklahoma legislature is addvessed below, A bill introduced into the 1991 legislature as House Bill 1526 would address local area economic development incentives by encouraging local for- mation of areas such as enterprise zones, histori- cal preservation areas, conservation areas and a specially defined concept uf an “economic growth area” to be determined by local governing bodies desiring to enhance economic development, Dis- tricts formed to pursue development goals would be limited to land areas under 26 percent of the area of the political subdivision and have an as- soased value under 16 percent of the region’s total 50 as to limit any 1ax revenue losses. These development districts would be encour- aged to form development plans and goals which would ultimatoly increase the tax base of the city, town or county, Implementation of an approved plan could then proceed with various tax incen- tives or exemptions, tax increment bonds for rais- ing capital, or use of other economic devices ga delineated in the draft legislation, The nature of limitations imposed on the abil- ity to grant incentives would, for example, (a) re- strict ad valorem exemptions or incentives "...only to the extent. of new investment made; (b) nat al- low such exemptions if a project was financed by tux increment bonds or if the property already benefits from the constitutionally allowed exemp- tions; and (¢) limit exemptions jn time to, say, Hive yeors or, in the case of enterprise zones, to six years. The new incentive structure for project f- nancing that is outlined within the draft is known aé “tax increment financing.” Basically, a taxing unit can define a certain base level of rates and assesaed Valuation and then adopt an increased portion of ad valorem taxes to be paid into a spe- cial fund to repay interest and principal on funds raised to implement the project plan, New autho- rization is evidently needed to protect the right of the taxing unit to make the desired divisions of funds for a specified period (8 years was suggested 24 in the draft), and outline requirements for altering the taxing scheme to protect the incremental project repayments. ‘The legislation would exempt tax increment bonds and resulting income from all state and lo- cal taxes, and usually limit the maximum period of time for repayment (25 years was used in the draft), Such bonds could not be general obliga- tions of the taxing unit and should not be included when determining debt obligations of the city, town or county, Incentive Controls, Competitive Giveaways and “Clawbacks” One analyst has recently characterized incen- tive packages as “economic steroids—in the short run, they strengthen communities in the race for new plants and expanded payrolls.”@9 Not surprisingly, many are suggesting that incen- tive bidding is getting out of control and some regulation and controls must be adopted to ensure "fair competition,” Incentive packages pre limited to certain types of firms, locations and/or uetivities, As such, they differ from other types of economic develop- mont programs affecting infrastructure, levels of eduention and other aspects of the business envi- ronment. Thege differences give rise to the main objections that have been raised against subsidies seen as “giveaways” by those not qualified to par- ticipate or those paying the bills.8° Some of the arguments follow: 1. Because of the selectivity of the incen- tives, they are frequently allocated in a political enyironment—usually to the larger, more visible projects. In many cases the expenditure criteria are seen as ad hoc, favoring visible high-tech projects, or open to political pressures or other manipulations. Some ques- tion whether the expenditures “crowd out" inveatments that would have been undertaken by other loeal firms not qualifying for the subsidies, 2. Incentives, whether direct subsidies or tax breaks, represent lost government revenues that could be spent more broadly on programs benefitting a broader array of local industries. Money spent. or not collected is not available for enhancing the general
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business environment or building in- frastructure, enhaneing education or adding informational services. 3. In most cases, there have been no im- plicit “contracts” to tie continued re- ceipt of incentives to performance tests, Clearly, resentment can build if expected benefits are not forthcoming and no adjustments ure required. In short, incentive packages developed during 4 process of negotiation or in response to ongoing bidding wars might well be Jess than optimal in relation to other uses of public resources directed toward community economic development, As to remedy, it does not appeur that federal Jaws are being debated to control the incentive bidding, nor are interstate compacts filling the void, Enforceable penalties of some form do ap- pear to be the most workable short-run solution for correcting mistakes of oyer-anxious bidders, In fact, some states and communities are beginning to develop careful monitoring syatems and writing certain restrictions into the wuthorizing legisla- tion. Some researchers have claimed that these aetiona may be the only viable, if second-best, so- lution to the incentive game, Overseas, such pon- alties are often called clawhacks, a comprehensive term for cancellation, reduction, and recovery of subsidies,"31 Oklahoma, oa is true for other states, is be- ginning to write some clawback features into the economic development laws, and probably more emphasis should bo placed on this control mecha- iam in the future. SUMMARY AND CONCLUSIONS The dominant perception that is revealed by this review of special programs for economic de- velopment is onv of satisfaction with the majarity of activities, and a common feeling that Okla- homa’s package is generally very compatitive with those of neighboring states. That is not, of course, the same as claiming either perfection or complete contentment. Individuals actively engaged in economic de- velopment. work on a daily basis respond quickly to requests for new ingentives to consider or old ones to modify or eliminate. Many can cite in- stances of the firm or industry that yot away to another state because Oklahoma's incentives weren't authorized for that particular business, of 25 the bureaucratic problems with procedures or turf battles, of the inadequate levels of financing from either the public ov commercial bank portions of an investment package, or of other cases where better laws or a more ethical environment might have given them the edge in the recruiting battles. With the possible exception that. financing might be the most wniformly perceived type of in- centive where the astute is least compotitiye, sug- gestions for modifying the state incentives are wide-ranging and frequently based on specific ex- periences and conditions somewhat unique to de- velopment objectives and targets of local commu- nities, Recruiters seeking aircraft parts firms might want mere fayorable inventory tax laws, communities with dominant. manutacturing plants may seek broader coverage for incentives for small firms providing supporting services, in- cubators may seek additional sources of venture capital, colloge towne may seek better incentives for research and development organizations, and 80 forth, Most of these special interest requests deserve # hearing and objective analysis. Some have a good basis for support; others may have alyeady been granted an incentive in other states and communities, Oklahoma would appear to have a good insti- tutiona) framework in which to have a public de- bate on the merits of incentive programs. The de- velopment of Oklahoma Futures and its provesses for setting statewide objectives, the renewed charge of leadership to the invigorated Depart- ment of Commerce, the prasence of standing committees for economic development in the state legislature, and the organizations of the private sector practicing in the field, are examples which point to a system of checks and balances where the general public interests can be debated against the specialized requests that support particular policy revisions, Oklahoma's incentive package is gen- erally perceived to be competitive. New incentives ought to be carefully justified, tied to specific per- formance criteria, and frequently monitored, to provide the necessary data for the desired cost- benefit analysis of the legislative oversight. pro- cess, Finally, Oklahomans should recognize that the combination of a competitive set. of incentive programs, a flexible institutional structure, and onhanced evaluation and monitoring will not guarantee economic development, Incentives are just one piece of the economic development puzzle;
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they are probably necessary to create a level play- ing field, but they are probably not sufficient, by themselves, to stimulate widespread and pro- longed development, That will take, in addition, abiding attention to the state's educational sys- tem, its physica! infrastructure, its locational ad- vantages, its image, and its regulatory climate, NOTES Olson, Kent W. “Reonomie Deyelopment in Okla- homa: A Synopsis of the Problem and a Review of the Lituraturs,” (Stillwater, OK; Oklahoma State Univer- sity, College of Business Administration, July 1986): 1. *Belden H.Daniels, “Oklahoma; Tools for o Global Competitor: A Report to the Joint Fiseal Operations Committee of the Oklahoma State Legislature," (Cam- bridge, Moss.: Counsel for Community Development, January 1987), ‘Judy, Richard W. “The Future of Oklahoma: Final Report,” (Indianapolis, Indiana: Hudson Institute, De- comber 1987), ‘For an oxeollent review of the issues sew Poter K, Eisinger, The Rise of the Entrepreneurial State: State and Local Reonomic Dewlopment Policy in dhe United States, (Madison, Wisconsin; University of Wisconsin Preas, 1988). ®Warner, Larkin and Stephen Smith, "State Goyern- ment Provision of Business Finaneein Oklahoma,” State Policy and Economie Development in Oklahama: 1991, (Oklahoma City: Oklahoma 2000, Ine. 1991), “Bartik,Timothy J. “The Market Failure Approach to Regional Econami¢ Development Policy," Boonamie De- velopment Quarterly, 4(4), November 1990, pp. 861-370, his author uses the term, “new wave approach,” to describe recent. emphases of development policies, TPailures can also occur in larme of undesirable income distribution and equity consequences of the morket resource allocation. Appreciation ia extended to Mr, D.E. Curtias af the Oklahoma Employment Security Commistion for pro- viding information and the annual report for the [TPA programs. My. Mark ‘Taylor genevously provided hiv time and efforts to provide data on the TIP program. "Oklahoma Employment Security Comminsion, An- nual Reports of the Job Training Partnership Act (ITPA) 1988-89 and 1989-90, (Oklahoma City, 101). OADpreciation is extended to Ms, Denise Aywu, Coordi- nator of the Bid Assistance Network, for information provided. information on REIS wos provided by Mx, Mary Jane Manegs, Oklahoma Department of Commerco, 26 12,4 ypreciation is extended to Mr. Alan Lewch of OCAST for providing reference documents and statistics "4 Smith, Stephen and Larkin Warner, "State Policy for the Development of the Wavehousing and Distribu- tion Industry in Oklahoma," State Policy and Economic Development in Oklahoma:1989, (Oklahoma City; Oklahoma 2000, Inc,, 1989), pp. 49-06; Mapprociation is extended to Mv. Monty Murphy, Deputy Director, Oklahoma Department of Trangporta- tion, for providing program information, 1 similar type of program far Lake Access Ronde is also funded at about $2.75 million per year. 15a pprociation is uxtonded to My. Craig Felber of the Canadinn County Commorcial Incubator and Me, Diana Russell of Rural Enterprises Ine. for information on Oklahoma incubator services, Appreciation ia extended to Ma, Mary Jane Manvss, Oklahoma Department of Commerce, for information regarding the Certified Industrial Park Program. J8Phis certification also qualifies designated parks ta participate in the Oklahoma Small Business Linked Deposit program, 19) nformutionon the Oklahoma City PTZ was provided by Ms. Carolyn Lyon, PTZ Administrator. 20, ppreciation for information used in this suction ia oxtonded to Ms. Kathy Bowles, Oklahoma Department of Commurce, *Rast, Joseph and Diane Bast, Coming aut of the Lee: A Plan to Make the 1990s Mlinole’ Deorde, (Chicugo, 1- linvis; Hearthind Institute, 1990), p. a9. *Pop a recent comparison of major incentives by state set the National Association of State Development Agencies, Dirvetory of Incentives for Business Invest- mont and Development ix the United States; A State-by- State Guide. 3d Edition, (Washington, DCs The Urban Institute Press, April 1991). % Glick, David 8. ,"Helping America Pronper," Forbes, June 24, 1991, Oklahoma Jauenal Record, September 14, 1991. Oklahoma Logixlatura, 1991, Senate Bill 618, Sec+ tion 1. 20) survey inaleumont was sent to 98 economic devel- opment officials acrosd the state, Twenty-four were yoturned and summarized in the text table. Six personal interviews ware conducted with local Chamber of Com- morce staff professionals for a more indepth review of experiences by the reypuctive cities and towns, “7Current state law, 68 89 2405.2, already allows ad valorem tax abatement on SIC 7374 if at least eighty percent of annual gross revenues are from the wile of a product or service to an out-of-state buyer ar consumer,
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™8Lage, Gorald M. "Sorvice Sector Exports of Oklahoma's Metropolitan Areas," Oklahoma Business Bulletin, 59(9), September 1991, pp, 21-30, 1 edebur, Larry C. and Douglas Woodward, “Adding a Stick to the Carrot: Location Incentives with Clawbacks, Recisions, and Recalibrations," Economic Development Quarterly, 4(3), August 1990, 225, 27 %° See Ledebur, Jid., for further discussion of these objections. 3 Ladebur, Ibid, p. 226, 2 }1ouse Bills 1769 and 1525 contained specifieclawback language for their respect incentives.
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CHAPTER II Alexander B. Holmes OKLAHOMA TAX EXPENDITURES FOR ECONOMIC DEVELOPMENT: POST HB 1444 INTRODUCTION H ouse Bill 1444, passed in the 1987 session of the Oklahoma Legislature, was hailed as a watershed piece of legislation that would cure the economic malaise in which Oklahoma’s economy had existed since the oil bust of 1982. HB 1444 was a grab-bag of institutional changes creating a multitude of governmental agencies, advisory boards and commissions. Oversight of debt issu- ance was increased by codifying standing Execu- tive Orders on the allocation of the Private Activ- ity Bond Cap. The Oklahoma Center for the Advancement of Science and Technology was constituted as a stand-alone state agency elevat- ing it from a unit of the existing Department of Commerce, and a variety of entities were created with the intent to address the alleged shortage of capital in Oklahoma for business formation. Other than the granting of loan guarantees by the newly constituted Oklahoma Development Fi- nance Authority (previously the Oklahoma Devel- opment Authority) precious little has come of these other capital creating entities, But if insti- tutional structural change was the problem with Okla-homa’s economy, certainly HB 1444 more than met the challenge. Since HB 1444, Oklahoma’s economy has grown steadily, albeit at a moderate rate. Unem- ployment declined from a high of 8.1 percent in June of 1987 to 6.6 percent in 1991. State rev- enues grew ata rate of five percent annually, ad- justed for tax rate increases and one-time revenue sources. Oklahoma’s financial institutions stabi- lized, after nearly a decade of turmoil, and have Alexander B. Holmes is a Regent's Professor of Economics at the University of Oklahoma, Norman, Oklahoma. once again begun to show modest profits. One would be hard pressed, however, to attribute much of this economic growth to any of the institutional changes forged in the Economic Recovery Act of 1987 (HB 1444). Indeed, the date of the passage of HB 1444 coincides almost exactly with what is now considered the end of Oklahoma’s oil bust recession: June, 1987. HB 1444 is, nevertheless, noteworthy because its approach to economic development problems is one of restructuring governmental institutions rather than affecting the private sector through either tax abatement or direct expenditures tar- geted to immediate business needs such as road- ways or employee training. This approach is in sharp contrast to economic development efforts that followed HB 1444 and that reached their zenith with the special legisla- tion to attract a United Airlines maintenance fa- cility to Oklahoma City in 1991, The character of economic development legislation became much more industry specific and very closely tied to the needs and requests of particular projects. Broadly speaking, this approach to economic development can be classified as project driven, with the state reacting to requests for either direct expenditures or targeted tax abatement. Elsewhere in this vol- ume the programs that the state has created to respond to requests for direct expenditures and fi- nancing to attract business projects are addressed. This paper discusses the tax abatement leg- islation implemented since HB 1444. Tax expen- ditures are defined and current ones are enumer- ated. The relative merit of tax expenditures is discussed. Finally, a detailed discussion of newly created tax expenditures is provided with a cri- tique of these as an economic development tool. TAX PREFERENCES PRIOR TO HB 1444 Tax preferences, or tax expenditures, are cre- ated when the state grants, as an exception to
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| 1 general policy, tax relief to a citizen, class of citi- gens, or organization, The Oklahoma Constitu- tion, in contrast to the U.S. Constitution and Con- gregsional practice, provides that all taxes must be uniform on all entities ina given class, This is a prohibition on “private legislation" and has been interpreted to mean that all tax laws must be “general” in nature. Classes of taxpayors can and are narrowly defined, however, allowing the cre- ation of tax preferences. One difficulty in differentiating a tax prefer ence or expenditure from an economic develop- ment incentive lies in the notion of what is the general tax policy of a state. Texas, for example, does not levy a corporate income tax based upon & firm's net revenues while Oklahoma does. Okla- hora, however, provides corporate income tax re- lief based upon investment and jobs created which ia considered a tax preference. Narrowly defined, the lack of a corporate income tax in Texas is not considered a tax preference because as gencral policy there is no tax at all. Tt is, nevertheless, an economic development tool, By contrast, Texas corporate franchise and property taxes exceed Oklahoma's by anywhere from three to five times. Again, unloes there are specific departures from general tax policy there are no tax profarences created, This points to the problorn of evaluating a state’s economic develop- ment efforts solely on the basis of tax preferences. A atate with low rates and no preferences may be more attractive than one with high rates and mul- tiple preferences, all othor things equal. Mind- lessly counting of tax preferences provides no meaningful information on the attractiveness of a atate for economic development from a tax burden perspective. Analyzing the tax preferences of a state can, however, be very instructive in determining the thrust of economi¢ development policy. Because by their very nature tax preferences are depar~ tures from the general tax law; they show the pub- lic policy priorities and business sectors targeted for special consideration, Much has been made of the “targeted industries” approach to economic development in Oklahoma and tax preferences are a potentially powerful too) to promulgate such a policy. ‘Tax preferences are nothing new to Okla- homa, Indeed, the first State Constitution pro- vided for tax relief targoted to homeowners through the homestead exemption to the property tax, Further property tax relief is provided Lo 30 Veterans of Foreign Wars, Because Oklahoma's property tax is embodied in the State Constitution, unlike other Oklahoma taxes, any tax preference created must be approved by a vote of the people. This has oceurred a number of times, providing relief to property in interstate commerce (the s0- called “in transit” amendment), and a five-year property tax exemption on new or expanded manufacturing and tourism facilities. Other significant tux preferences exist in Oklahoma's tax code. A study by the Oklahoma Office of State Finance estimated that for FY 88 some $788 million dollars in tax preference existed on 182 separate exceptions to the general tux code,! The value of these tax preferences in FY 92 are, of course, significantly greater, Table 1 displays the existing tax preferences by tax, and the estimated level of tax relief pro- vided for FY 68, as well as the tax preference as a percent of the total revenue from the tax, As can be seen in Table J, the vast majority of tax relief is provided through the sales tax, ‘This is because of Oklahoma's policy of generally exempting services trom the gules tax, designated as "Not Specified in Tax Gods,” ‘Table 1 also points to the high level of tax preferences, as a percent of taxes levied, in the corporate income tax and motor fuel tax. Notably, the (ax preference in the corporate income tax generating virtually all the Lax reliof is the solar energy credit, hardly a major economic develop- ment devise. The motor fuel tax preference does, however, come from areas which could provide a true economic development incentive: fuel for air- craft engines operated on stands for training, testing, or research, and diesel fuel for non-high- way use. Aircraft maintenance facilities, con- struction firms, petroleum exploration, production and distvibution activities, and manufacturing using diesel as a fuel are the prime beneliciaries of these tax preferences, Certain of the tax preferences existing in 1987 could be considered economic development tools, rather than general Lax relief, as ia the case for tax preferences on services. These are listed in Table 2. Of those listed, six were passed into law in 1987, the same year as the passage of HB 1444, indicating that these economic development tax preferences were being promoted simultaneously with the work on the restructuring of the state in- stitutions charged with economic development. ‘Table 2 shows that, after deleting preferences aftey passed in 1987, economic development pref- erences were generally broadly based, Agriculture
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as an industry received particular attention, but major tax preferences such as the ad valorem ex- emptions, the investment/new jobs corporate in- come tax credit, and exempting business services from the sales tax, provided relief regardless of size of firm or economic sector, The legislative his tory of most of these tax preference further con- firms the impression that they were provided as part of a broad based economic development strategy, and were not simple responses to specific requests for special legislation. ‘TAX PREFERENCES POST-HB 1444 Beginning with the 1987 legislative session, nearly two dozen tax preferences were added to the tax code, These are displayed in Table 3, Many of these tax preferences were created and amended several Limes in their short history. The exemption of sales tax on building materials used in constructing a new plant with employment of more than 100 new workers (known as the “Kim- berly-Clark Bill" - HB 1687, 1988 legislative ses- sion) has been amended by four separate bills in its short life. Indeed, this tax preference was both the first passed after the passage of HB 1444 to attract a major business and a model for most of the tax preferences passed since 1987. Anumber of'general conclusions can be drawn from the material displayed in Table 3. First, with few exceptions, tax preferences created during the past five years were given to attract a particular project which had reduced its final site selection to a few (usually) unnamed other states and Okla- homa, These tax abatements were typically sug- gested by the corporation or a site selection firm hired by the corporation, These abatements were explicitly a quid pro quo for locating in Oklahoma. As such, these tax preferences were not part of a broader economic development strategy to target specific industries. TABLE 1 Oklahoma Tax Preferences Estimate tor FY-88 Abatement as a Tax Preferences Quantily ($ Millions) Percent of Total Tax Individual Income Tax 22 $ 15.872 1.09 Corporate Income Tax 8 7.555 8.09 Sales and Use Tax Specified in Tax Code: 16 $ 97.048 Not Specilied in Tax Code: 55 $20,567 Total Sales and Use Tax ~~ 70 617.615 82.00 Motor Fuel Tax 5 55.554 21.00 Gross Production Tax 0.188 0.05 Petroleum Excise ° 0,000 0.00 Conservation Excise 0 0,000 0.00 Ad Valorem Tax 9 83.900 9.08 Insurance Premium Tax 1 0.000 0,00 Alcoholic Beverage Excise Tax 3 NA NA Alcoholic Beverage Identification Stamps 0 0,000 0,00 Mixed Beverage Gross Receipts Tax 0 0.000 0.00, Cigarette Stamp Excise Tax 1 0.102 0.13 Tobacco Products Tax 1 0.015 0.02 Auto Registration and License Tax 8 0.781 NA Truck Registration and License Fees 2 6.191 NA Boal Registration and License Fae 1 0,000 0.00 Occupational, Health and Safety Tax 0 0,000 0.00 Total 192 $787,719 31
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TABLE 2 Tax Preferences for Economic Development Estimate for Estimate for FY-88 FY-88 ($Millions) ($Millions) Corporate Income Tax Sales Tax Investment/New Jobs Credit Advertisii $13,758 Credit for investment in property that results In a nat increase in the number of full-time-equivalent employees. Statutory Cite: 68 O.S. 1981 § 2357.4 as last amended by Section 10 of SB 36 of 1st Session of 41st Oklahoma Legislature (68 O,S, 1987 Supp. § 2357.4) Credit for Investment In Qualified Venture Capital Companies* A ccradit, not to exceed 25% of costs, invested in Qualified Venture Capital Companies, Statutory Cite; 68 O.S. Supp, 1986 Supp., Section 2357.4 as last amended by Section 10 of SB 36 of 1st Session of 41st Oklahoma Legislature (68 O.S, Supp, 1987 § 2357) Recycling/Destruction of Deloterious Substance Credit* Credit for engaging in recycling, reuse or ullimate destruction of any Controlled Industrial Waste or Delaterious Substance. Statutory Cite: 68 O.S, Supp, 1986 Section 2357.16 as last amended 3 of HB 1086 of Ist Session of 41st Oklahoma Legislature (68 O.S. Supp. 1987 § 2357) Inventors Exemption* Income earned from products developed under the Inventors Assistance Act shall be exempt for a seven-year period (effective 1 November 1987) Statutory Cite: 68 O,S, 1981 § 2359 as last amended by Section 11 of SB 36 of ist Session of 41st Oklahoma Legislature (68 O,S. Supp, 1987 § 2359) Technology Transfer* The royally payment which a corporation receives for transferring technology to qualified small business Is exempt from taxation. Statutory Cite: 68 O.S. 1981 § 2358 as last amended hae ya 112 of HB 1440 of 1st Session of 41st Oklahoma Legislature (68 0.8, 1987 Supp. 2358) $.764 NA NA NA NA 32 ing Sales of advertising space in newspapers and ret pes and billboard advertising service, and any advertising through the electronic media, including radio, television and cable television. Statutory Cite: 68 O.S, 1985 Supp., 1357(E) Agricultural Products Sold From Farm to Consumer $. 207 Sales of agricultural products produced in this state by the producer directly to the consumer from a farm are exempt from sales tax. Statutory Cite: 68 O.S. 1985 Supp., 1958(A) Business Services (Not Specified in Tax Code) $34.986 (a) Advertising Services $ 2.670 (Advertising other than by direct mail which is not taxed and not specifically exempted by 68 O.S, 1985 Supp., 1357(E)) (b) Services to Dwellings and Other Buildings $ 3.090 (c) Computer and Data Processing Services $ 4.966 (d) Management, Consulting, Public Relations Service $ 7.687 (a) Credit Reporting, Collection gencles $ 1.451 (t) Direct Mail Advertising Services $ 473 (9) Blueprinting and Photocopying Services $ .295 (h) Stenographer Services and Reproduction Services, n.e.c. $ 238 f Personnel Supply Services $4 008 Research and Development Labs = $ .233 (k) Testing Labs and Facilities $ 1.669 (I) Detective Agencies and Protective Services $1,776 (m) Sign Painting Shops $ .089 (n) Interior Designing $ 446 (0) Telephone Answering Services $ 389 (p) Other Business Services, n.6.0, $ 4,908 Professional Services (Not Specified In Tax Code) $57.431 (a) Legal Services $19,986 (b) Selected Educational Services $1.777 (c) Engineering, Architectural, Surveying Services $24,741 (d) Accounting, Auditing, Bookkeeping Services $10.927
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TABLE 2 (continued) Tax Preferences for Economic Development Estimate for Estimate for FY-88 FY-88 ($Millions) ($Millions) Motor Fuel Tax Insurance Premium Tax Gasoline for Agriculture $1.374 Credit for Regional Home Office* Motor fuel for farm tractors and stationary Statutory Cite: 36 O.S. 1987 Supp, engines used for agricultural purposes § 625.1 NA within the state are exempt from 13,92¢/gal, Auto Registration and License Tax of the 16¢/gal. excise tax on gasoline. Taxicab Statutory Cite: 68 O.S, 1981, 509(b) as Flat rate of $28 annually $.040 last amended by Section 6 of HB 1061 Statutory Cite: 47 0.5, 1981 § 1134.1 of 1st Session, 41st Oklahoma Legislature Truck Registration and License Tax (68 O,S. 1987 Suppl, 502.6(8) Farm Trucks Diesel for Agriculture $7.595 Trucks or truck tractors used for Diesel fuel for farm tractors and farm use having a carryln $6,131 anes v.enories any srcunvely for agricultural purposes is exempt from the Oklahoma Excise Tax on diesel. Statutory Cite: 68 O.S, 1981, 509(b) as last amended by Section 7 HB 1061 of 1s! Session, 418t Oklahoma Legislature capacity of less than six (6) tons. Statutory Cite: 47 O,S. 1986 Supp., § 1134 Farm Trailer or Seml-Traller Exampt from required to be registered if its laden weight is 30,000 Ibs. or less. NA Statutory Cite: 47 0.S, 1986 oath § 1134 (68 0,S. 1987 Supp. 502.7(B) Boat and Annual Registration and License Fees Gasoline for Aircraft $13,529 Fleet Rate for Annual Registration Motor fuel for use In aircraft or in and License Fees* aircraft engines operated on test stands for Preferential rate for fleets of 20 or mora training, test, or research purposes |s boats used for rental, al a single anchorage. exempt from 15,92¢/gal, of the 16¢/gal, Statutory Cite: 63 O.S, 1981 § 804.2 as Oklahoma Excise Tax on gasoline. last amended by Section 197, of HB 1473 Statutory Cite: 68 O.S, 1981, 508 as last of the 1st Session of the 41st Oklahoma amended by Section 6 of HB 1061 of islature (63 O.S, Supp. 1987 § 804.2) 1st Session, 41st Oklahoma Legislature AD VALOREM TAX (68 O.S, 1987 Supp, 502,6(B)) Five year exemption for new or expanded Diesel for Non-Highway Use $32,708 manufacturing or tourism facilities Diesel fuel which is used exclusively Statutory Cito: Oklahoma Constitution, for purposes other than to prope! motor Article 10, Section 6B vehicles over public highways is exempt from the Goods in Interstate Commerce NA Oklahoma Excise Tax on Diesel. Statutory Cite; Oklahoma Constitution, Statutory Cite: 68 O.S. 1981, 509(a) as Jast Article 10, Section X amended by Section 7 HB 1061 of 1st “Passed in 1987 sossion of legislature Session, 41st Oklahoma Legislature (68 O.S, 1987 Suppl. 502.7(B)) Gross Production Tax Enhanced Recovery Exemption $.188 Any incremental praduction which results from a new enhanced recovery project shall be exempt from tho gross production tax until project pe is achieved, but not to exceed a period of thirty-six (86) months, Statutory Cite; 68 O.S, 1981, Section 1001 as last amended by HB 1139, Section 1, of 1a! Session of 4181 Oklahoma Legislature (68 O.S. 1987 Supp,, § 1001) 33
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TABLE 3 Tax Preferences, 1988-1991 Bill Number Cite Synopsis Peculiar History Revenue Impact HB 1637 (1988) ("Kimberly-Clark Bill") HB 1460 (1989), SB 169 (1991), HB 1517 (1991) 68 O.S, Supp, 1988, Section 1359, 1359.1 and 1369.1 and 1404.1 Plants which create 100 new jobs with project cost of atleast $5 million willbe allowed a sales tax exemption for materials used in construction of the facillly on purchases made within 24 months of effective date of act. Effectve date of act was 6/1/88, Set up sales and tax refund accounts for administering the exemption. HB 1637 (1988) was the first major piece of legislation meant to entice a major manulacturer to Oklahoma after HB 1444 (1987) was passed. The sequence of events, the cost of the facility and the increase In full- time employment (FTE) resulting from the construction narrowly focused the exemption. HB 1460 (1989) expanded sales tax exemption to tangible personal property purchased by a new or expanding tourism facility with 100 new FTE within 2 years of beginning date of employment, SB 163 (1991) makes the sales tax exemption permanent for purchase of construction materials for naw and expanding manufacturing facilities by removing the expiration date of HB 1637 (1988). HB 1517 (1991) is a companion to SB 163 (1991), HB 1517 lowers the FTE requirement to 75 if cost of construction materials is greater than $10 million and the total cost exceeds $50 million, See Table 4 Bill Number Cite Synopsis Peculiar History Revenue Impact SB 421 (1988) ("PAN-AM Bill”) 68 Supp, 1988, Sections 1357, 1357.1 and 1404.2 Sales tax exemption for sales of computers, data processing equipment, and related telecommunications equipment to a new or expanding business. Sale of such items must equal or exceed $2 million. Must add at laast 100 new FTE. Effective tor 36 months. Set up sales and use tax refund accounts which will be remitted with Interest to purchaser of equipment at time FTE js certified. PAN-AM's financial difficulties precluded any new expenditures See Table 4 Bill Number Synopsis Peculiar History Revenue Impact SB 1 (1991 First Extraordinary Session) ("United Airlines Bill) Set fee of $250 per aircraft in process of manufacture in liev of the personal property tax, Effective 1 1/ 92 with no expiration date, Provided sales tax exemption for sale of aircraft ( no expiration date). For sales of computers, data processing equipment, related peripherals and telephone, telegraph or telecommunications service and equipmenttor use in a qualified aircraft maintenance or manufacturing facility (no expiration date), for sales to a qualified aircraft maintenance or manufacturing facility of tangible personal property consumed or incorporated In construction or expansion of a qualified aircraft maintenance ar manufacturing facility (no expiration date), for sales repair machinery, equipment, ete. used in aircraft maintenance facility primarily engaged in repair, building or rebuilding with qualification of 2,000 FTE or construction costs exceeding $5 million and 250 new FTE and which is owned or leased by aircraft facility employing atleast 2,000 FTE, Extended the deadiine for income tax credit for investment in depreciable property from 1955 to 2003 Corporate income tax liability was changed to ba based on air miles traveled in Oklahoma divided by total alr miles traveled. Must have 2 of more such facililies in state before this saction Is valid, Provided tax exemption of aircraft excise tax for aircraft manufactured in Oklahoma with a selling price in excess of $5 million, The United Airlines announcement to construct a new aircraft maintenance center brought forth proposals from a number of large cities. Oklahoma City developed a package of incentives in 1990 and additionally a special legislative session was called In January 1991 to provide tax Incentives, United did not pick Oklahoma City for its maintenance facility None 34
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TABLE 3 (continued) Tax Preferences, 1988-1991 Bill Number Cite Synopsis Peculiar History Revenue Impact HJR 1015 (1990) Tax Increment Financing/Tax Credits for use at Local Level Oklahoma Constitution Article X Section 6. Legislature may grant cities, towns or counties the ability to provide incentives, exemptions and other forms. of tax relief for historic preservation, reinvestment, or enterprise zones in areas that are exhibiting eco nomic stagnation or decline. A totally new section of the Constitution. Authorizes tax increment financing and tax credits al the local level for the first time, There must be legislative action to put this into force, This has not occurred yet. Bill Number Cite Synopsis Peculiar History Revenue Impact HB 1176 (1987) (’State Farm" Bill) OS, 36, Supp. 1991, Section 625.1 and Suction 625.2 Grants out-of state insurers who establish regional office or expand existing ones in Oklahoma after November 1, 1987 privilege to apply for credit on Insurance premium taxes. Credit percentage from 15% (250-299 FTE) to 50% (more than 500 FTE). Exemption is continuous with annual certification of FTE by Insurance Commissioner. Used to entice State Farm to establish a regional office in Tulsa, 1988 through 1991 the Home office credits will total $5,565,338, There are two firms qualifying: State Farm and Aetna; however, State Farm is the larger. Bill Number Cite Synopsis Revenue Impact HB 1444 (1987) Sections 46 & 47, HB 2190 (1990) - CAPITAL INVESTMENT ACT 74 0,S. Supp. 1990, Section 5061.1 through 5061.11 State issued income tax credits and transferred to Oklahoma Capital Investment Board with total to equal $50,000,000. Credits are transferrable, Can not be exercised before July 1, 1990, nor after July 1, 2015. Capital Investment Board shall determine the amount of individual tax credits to be transferred pursuant to this act. Capital Investment Board may negotiate for sale of such credits on behall of Oklahoma Development Finance Authority. Total cannot exceed $10,000,000 per year Billi Number Cite Synopsis Peculiar History SB 534 (1990) and SB 552 (1990) HORIZONTAL DRILLING 68 O.S. Supp. 1990, Section 1001 (Horizontal drilling 62 0,S. Supp, 1990, Section 87.1 (Spacing) Exempts from gross production tax horizontally drilled wells for two years or until project payback, Oklahoma reportedly does not have the type ‘of rock formations that make horizontal drilling cost effective, Bill Number Cite Synopsis Peculiar History Revenue Report HB 2169 (1990) as amended by HB 1193 (1991) COMPRESSED NATURAL GAS TAX CREDITS 17.0.8, Supp. 1990 Section 601-610 as amended by HB 1193 (1991) “Oklahoma Alternative Fuels Conversion Act" provided for certain vehicles to be converted to compressed natural gas. Set up a fund as a source of revenue for conversion of school buses and other public sector vehicles, Provided for a 20% of cost income tax credit for conversion of private sector vehicles which was increased in 1991 to 50%. Also set up an “in lieu of motor fuel tax” to equal estimated motor fuel tax revenue. Strongly supported by natural gas industry in Oklahoma. Initial goal was to provide for cost of public sector vehicle conversion to compressed natural gas and to provide for a revenue source. In 1991 the natural ha industry was successful in amending the legisiation to apply the income tax credit to cost of building ill stations. Increase in income tax credit to 50% Is only effective for taxable years beginning prior to January 1, 1993, which may mean that the state will have a decrease in income tax that will not stimulate investment in compressed natural gas vehicles or fill statlons above that which would have occurred without the increase, 36
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TABLE 3 (continued) Tax Preferences 1988-1991 Bill Number HB 1444 (1987) HB 1907 (1988), HB (1989) ("Merrill Lynch” Bill) Cite 68 Supp. 1988, Section 2357.7 Synopsis 20% tax credit is provided for investments In qualified venture capital companies, At least 55 percent of the capital must be invasted in Oklahoma business ventures to recelve the credit. Must provide at least $5 million of initial capital. Pocullar History HB 1444 (1987) 20% income tax credit for venture capital, HB 1907 (1988) reduces required amount of inve: in Oklahoma business ventures from 66% to 55% and Increases time In which an investment can be made from 3 to 5 years, HB 1560 (1989) expands venture capital income tax credit to include investment in development of certain tourism facilities, Revenue Impact $2.4 million for FY 89 but final amount unknown since Merrill Lynch Oklahoma Ventures Partners has not Invested allot itstunds, —_ Bill Number SB 36 (1987) SMALL BUSINESS INCUBATORS INCENTIVES ACT Cite 740.8, Supp. 1990, Section 5071-5079 Synopsis Income earned by a sponsor from rental and service fees paid by a tenant is exempt from state income tax for 7 years. Tenants are exempt {rom paying stale income tax for a 2-year period on income earned as a result of occupancy in an incubator. Peculiar History Not amended thru 1991 session. Revenue Impact Unknown = = = Bill Number HB 1470 (1987), HB 1940 (1990), HB 1759 (1991) ENTERPRISE ZONES Cite 62 O.S. Supp. 1990, Section 690.1 el seq. Synopsis Defines enterprise zones which may bo in elther depressed counties or inner cities. Provides double investment/new jobs tax credits, sales tax exemption for most manufacturing concerns, and low interest loans. Definition of eligibility of an area to be defined as an enterprise zone has changed aver time through several pleces of legislation - HB 1470 (1987); HB 1940 (1990); and HB 1759 (1991). Peculiar History Primary purpose is to entice firms into areas of high unemployment. Revenue Impact Unknown : Bill Number HB 1340 (1991) ("Fort Howard Paper” Bill) Cite 68 O,S, Section 2357.51 et seq Synopsis 15% Income tax credit tor investment cost of racycling waste paper facility, Credit only for $10 million tacilily if combined cost of construction material and other tangible personal property exceeds $50 million. No FTE requirement. Time limitation is on or after 1/1/92 and belore 12/31/95, Revenue Impact: —_Not Applicable at this time iy bo = 7 Bill Number HB 1139 (1987) ENHANGED RECOVERY GROSS PRODUCTION TAX EXEMPTION Cite 68 O.S, Supp. 1987, Section 1004 Synopsis Incremental production resulting from enhanced racovery projects exempt from gross production taxes, Time period from project beginning to projact payback, but not ta exceed 36 months for tertiary enhanced recovery projects existing on effactive date of July 1, 1988, Second, while the original versions of the tax preferences typically had a sunset clause in order to close the tax abatement once the specific project qualified, they have become a permanent part of the tax code through later amendment. Finally, building upon the form of the Kim- berly-Clark Bill, the state requires some form of ac- 36 tual performance in terms of new jobs created in or- der to qualify for the tax abatement. Other than the investment/jobs corporate income tax credit, no pre- vious form of tax preference had such a performance criterion. A salutory benefit of this requirement was the ability to determine just what the cost to the State Treasury was for the new jobs, because the
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taxes had to be paid into an eserow account and then refunded upon certification of qualification by the State. As can be seen from Table 3, it is too early to determine the full value of these tax preferences in terms of tax reduetions, To an extent, this is because many of the sunset datos have been ex- tended or removed, but it is also because many of the projects for which they were created haye not had time to he built and expand the employment level to become qualified for the tax abatement, Only then can a thorough analysis determine both the benefits and costs of these economic develop: ment incentives. Two tax preferences, exempting sales tax on construction material (HB 1637 - 1988 session) and telocommunications equipment (SB 421 + 1988 session) have had a long enough history to begin to develop figures on the niagnitude of the tax preference provided, Table 4 displays the de- posits to the Oklahoma ‘Tax Commission refund fecount for sfefe palos taxes under these two pref erences, (City and county sales taxes are nlso for- given under this program and the amount for FY92 through December, 1991 is $1,445,010,) TABLE 4 State Sales Taxes Escrowed for Refund* FY-88 $ 0 FY-69 49,000 FY-90 677,000 FY-91 709,000 FY-92 (through December 1991) 3,674,181 *Eacrowed under 660.8 Supp. 1968 Secion 1957, 1457.1, 1369, )959.1, 1404.1 ang 1404.2 ‘Source: Ohlunana Tax Gonvrisaian Annual Mlaporie PY Of FY 90 and Apporiianmment dournal, Oflicw al Siule Finainen FY 9) ward N¥92, This form of tax preference is growing dramati- cally, providing $935,000 in tax relief in Novem- ber 1991, alone. Cloarly this level of Lax relief was unintended, One of the tax preferences was ere ated for a project (hal failed to malteriplize, a res: ervation center fr PAN-AM Airlines, Whether this level of tax relief is currently acceptable ov necessary to induce the economic development projects qualifying under this program is an open question, SUMMARY AND CONCLUSIONS ‘Tax preferences exist in all tax codes aver in- stituted. They may be provided to promote either general tax relief or specific social goals, such as homeownership. They may also form part of a carefully conceived economic developmant plan, When done |n this fashion, they are proposed by policy makers as a package, after study, to deter- mine those industries most sensitive to marginal tax changes and least likely to find Oklahoma an attractive site for other reasons. (It does not make economic¢ sense to provide an economic incentive for projects that will likely locate in Oklahoma without one), The use of tax preferences since the passage of HB 1444, and particularly in 1991, when seven such preferences were created or amended, is not part. of such a package. These preferences have heen project driven and thus created purely on An ad hoc basis, Further, these tax preferences sig- nificantly favor large enterprises rather than amall businesses. This has been modified to some degree recently, as the quid pro quo for locating or expanding in Oklahoma in terms of new jobs has been reduced, Under moat of the new tax prefer- ences it requires from 50 to 100 new jobs to receive the tax preference, Tax preferences are nol costless from a public finance perspective, The most obvious loss is Lo the state treasury in terms of tax revenue required for the public services demanded by new and ex- panding business. The economic development programs described elsewhere in this volume are funded in large measure by genera) fund tax col- lections. A second cost of tax preferences is the effect they have in narrowing the tax base and a source of increased volatility of tax collections. ‘They also raise questions of equity in the tax code and may increase administration casts in tax col- loctions 2 Whether the benefits of new jabs from specific projects are worth the cost in terms of foregone reveriue and a narrower tox buse is 4 de- hate that has not heen resolved, The opportunity for the ereation of new tax preferences may, however, be severely limited if State Question 640 should be approved in a state- wide election scheduled March, 1992, Under this proposed Constitutional Amendment, all “revenue bills" Would have to receive approval by three- quarters af the members of both houses of the Legislature and the Governor to be put into offoet
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without a vote of the people, Even then, “revenue bills" would not take effect until 90 days after the end of the legislative session, Passage by a simple majority would require approval in a statewide election not sooner than 90 days from the end of the legislative session, which must conclude at the end of May, A “revenue bill” has been defined many times by the Oklahoma Supreme Court and by Federal Courts in many jurisdictiona.2 In many cases, a revenue bill includes not only revenue raising legislation but also reveriue reducing legislation. However specific litigation should finally settle the matter, the expense of a state-wide elec- tion (some $900,000) the significant delay in en- acting such a measure, and the uncertainty of the outcome of litigation on a specific tax preference, would work against the short time frame in which most of these economic development projects op- erate, 38 State Question 640, jf passed, will take fram the Legislature, for good or for ill, the wbility to re- spond in a timely way with economic development tax incentives for projects that could mean new jobs quickly. NOTES leTax Preference Report FY88" Pete Soule, Office of State Finance, State of Oklahoma, October 1987, APhese isswes sire trented in more detuil in "Changes in Oklahoma's Tax Bose in the 1980's: Implication for Beonomic Development” in State Policy and Economic Development in Oklahoma: 1991, A Report to Oklahoma 2000, Inc,, February 1991, p. 53-60, SWords and Phrases” Permanent Bdition, 397A, 1990 Cummulitive Annual Pocket, Weal, pe 103,
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CHAPTER III David Penn Craig Knutson MARKETING AND AWARENESS OF STATE FINANCIAL ASSISTANCE PROGRAMS INTRODUCTION L ack of awareness regarding state programs among potential lenders, such as bankers, and potential borrowers, such as manufacturers, will affect the mix of businesses that apply for and receive assistance from the state. The mix of applicants is important, since state financial as- sistance programs are sources of job and income creation in Oklahoma. Lack ofinformation regard- ing these programs could result in a portfolio of projects that is sub-optimal from the perspective of long-term economic growth in Oklahoma. Since information is costly to produce and distribute, there will inevitably be projects that should receive funding from state agencies that go unfunded due to lack of awareness of the programs. While pro- gram managers probably do well in terms of se- lecting the best projects from the pool of applicants, the issue is whether the pool of applicants consists of the best potential projects. Businesses that are not aware of the programs cannot apply. Businesses and financial institutions may have many reasons for not taking advantage of state financial assistance programs. Perceived high administrative costs of monitoring and financial documentation may discourage applications to the programs. Other reasons include the difficulty of satisfying eligibility requirements, costs related to traveling to agencies at the state capital, and perhaps even a disdain for government programs in general. David Penn is Assistant Director of the Center for Economic and Management Research, The University of Oklahoma, Norman, Oklahoma. Craig Knutson is Staff Economist of Southwestern Bell Telephone Company, Oklahoma City, Oklahoma. 39 State agencies and authorities have little con- trol over some of these factors. They can greatly influence, however, the manner in which informa- tion regarding these programs is produced and distributed and therefore affect the level of awareness of the programs. The purpose of this chapter is to examine the level of awareness among Oklahoma bankers and manufacturers regarding state financial assistance programs. First, the current strategy of marketing state programsis presented from the perspective of the agencies. The next portion of the chapter sum- marizes a survey of awareness of state financial programs among Oklahoma bankers and manufac- turers. Finally, the last section offers some con- cluding comments. CURRENT STATE PROGRAM MARKETING STRATEGY The level of awareness of the programs is par- tially determined by marketing strategy. Thus, it is important to examine how state financial pro- grams market their services and how from the perspective of the agency, given additional re- sources, they might be marketed differently. In- person and telephone interviews were scheduled with managers of each of four state programs that are involved in lending to manufacturers and/or small business firms within the state. These pro- grams are: the Oklahoma Linked Deposit Pro- grams (OLDP), Oklahoma Finance Authorities (OIFA & ODFA), Export Finance Program (EFP) at the Oklahoma Department of Commerce (ODOC), and the Community Development Block Grant - Economic Development Financing Pro- gram at ODOC. Our questions to each of the managers were: (1) How do you currently market your program? and (2) If you could make any changes, how would you change the manner in which you currently market your program? A summary of these dis- cussions follows.
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| Marketing the Linked Deposit Program Mr. Dick Jones, Manager of the Linked De- posit Program, indicated that the current market- ing strategy utilizes the Oklahoma Department. of Commerce (ODOC), forums at local chambers of commerce, and banking institutions. According to Mr, Jones, the program reaches the “average” business person and most industrial classifica- tions by utilizing these three primary avenues. However, eligibility under the Small Business Programs does place emphasis on businesses that could locate within any industrial park and any publie trust involved in industrial development, Mr. Jones says that the primary marketing focus is with banker's; of the three marketing av- enuge they have employed, bunkers have been more successful in. promating the progvam. He states that demand has been quite high for the program (over 1,800 applications), despite a rela- tively conservative banking environment within which to operate, The programe have been more succossful in some geographic arenas than others but, he asserts, that is more a function of the local management philosophy of the bank than the lack of marketing. He also said there has heen a mis- understanding, in jarticular within the media, as to what the program entails and what it hopes to achieve. A better edocutional awareness cam- paign is being considered to offset that. problem, Overall, the demand forthe program has been streng and he expects the trend te continue. Emphasis by federal banking authorities on the Community Reinvestment Act should help stimu- late even greater demand for the program. The only major change Mr. Janes would make involved inevoasing and improving the media’s awareness of the program; with a better understanding of the program, the media would be a move positive in- fluence in future marketing efforts. Marketing the Oklahoma Finance Authorities Progams According to Mr. Jay Casey, Director of the Oklahoma Finance Authorities (OPA), the OBA uses the ODOC and its Teamwork Oklahoma pul: licity campaign as ils primary marketing tool. Mr. Casey says that ODOC publications, partiou- larly those geared exclusively to business finane- ing programs offered within the state, have been very effective in stimulating demand, In fret, the Oklahoma Industrial Finanee Authority is cur- rently nearing its maximum lending capacity. 40 Knowledge of and interest in the program contin- ues to grow, especially with the tough banking environment brought on by non-performing loans and stricter regulatory oversight. As ty what changes be would make to market his programs differently, Mr. Casey would make only one suggestion, The OTFA averages about $20 million per year in new lending; currently the Authority is within $26 million of its lending eap, With the lending limit of the program rapidly be- ing approached, Mr. Casey suggests increasing that limit. Such a move would encourage more manufacturers to apply and allow the OLFA to be even more visible. Mr. Casey argues that the use of local chambers of commerce across the state as well as the ODOC has proven to be a very effective approach to informing the manufacturing sector about. financing both the expansions of their exist- ing operations and new start-ups, Marketing the Export Finance Program ‘The Export Finance Program, administered through the Capital Resources Division of ODOC, was developed to assist small. and medium-sized Oklahoma businesses in gaining success to short- term expital necessary for expansion into overseas market. Its intent is to inerease the atate’s level of exports by diversifying the bases of current ex- porters. Mr, Robert Heard, Director of the Capital Resources Division, stated that the EFP is pro- moted in several different ways, but primarily and most effectively through staff interaction with banks. The Oklahoma Bankers Association has been @ primary target for promotional material and personal contacts. The ODOC, as with the other financing programs previously discussed, prepares press releases and articles about the EMP, and the BFP Director, David Wantland, has made numerous presentations before civic, pro- fessional, and banking organizations to promote the program, Mr. Heard feols that demand in the BFP fs quite strong and continues to build, As to how the program could be marketed better, Mr. Heard be- lieves that it is vital to inform the financial net- work of packagers, bankers, and other finanvial institutions about the value and workings of the program before any large scale marketing pro- gram is developed for Oklahoma businesses, Ex- plaining the benefits of providing working capital to Oklahoma businesses to private lenders while,
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ut the same time, providing them with the protec+ tion against non-payment is the most critical atep in successfully developing this program, according to Mr, Heard, Marketing the Economic Development Financing Program (CDBG) The final program analyzed waa the Commu- nity Development Block Grant Programs, also administered out of ODOC, Mr. Gary Miller, Di- rector of Planning and Development, states that the federal programs are designed *to assist start- up and expanding companies in the creation of Jobs for rural arans and small towns.” While units of government make application, companies pri- marily involved in manufacturing are cligible to participate. Mr, Miller cited several examples of how the CDBG-Eeonomic Development. Minancing Pro- grams have been effectively used across the state, In some instances, the community has an infra- structure need that must be met in order to either attract and/or retain an industrial prospect. Cities such as Jenks (Kimberly Clark), Miami (U.S, Ma- rine/Bayliner Corporation), and Fairland (Sim- mon Industries Inc.) are just a few examples of how CDBG grant monies allovated to small Okla- homa communities created and/oy retained local employment, The grants to communities cannot be speculative; they must be tied to employment retention and/or expansion, The most common use of CDBG monies under Mr. Miller's program is for the purpose of business financing in the Economie Development Financing (EFP) program. Funds used for this purpose out- weigh infrastructure grants by a ratio of 8 to 1, The CDBG Program is not a primary lender and has used the gap financing concept with local banks quite effectively, Thus, having an effective working arrangement with private sector lenders becomos critical to securing qualified applicants. Mr, Miller reports that the program is mar- kelted primarily through a monthly newsletter, speoches given by staff in local communities, and personal contact with private sector lending insti- tutions. Since they are not a primary lender, the CDBG programs seek to stimulate greater inter- est from the private sector, so that more “capital blending” can take place. They have two primary markets: local com- munities and priyate lenders, The programs mar- 41 ket the strategic planning process to local commu- nities and the benefits of participation with CDBG to financial lenders, Mr. Miller's primary focus has been to minimize regulatory problems and to build long-term credibility with both constituents, Thus, current programs are marketed a vari- ety of ways including presentations at meetings, newsletters, pamphlets, and through financial intermediaries. In addition, the managers of the programs stated that demand for their product, in most cases, outstripped their ability te supply ad- ditional capital. Giyen this imbalance, the agen- cles have little planned in the way of expanded marketing of those programs. AWARENESS OF PROGRAMS AMONG BANKERS AND MANUFACTURERS The importance of the banking sector to the state's economy typically is measured in terme of loans, deposits, and nssets, Indeed, the sector's current portfolio of more than $29 billion in loans, including $7 billion in commercial and industrial loans, is a major source of liquidity and capital formation in the Oklahoma economy, But supplying capital for growth is not the only potential contribution of the banking com- munity, Bankers can also provide important in- formation to business customers regarding not only opportunities for bank loans but also alterna- tive financing mechanisms such as state govern- ment financing programs, That is, bankers can act in an intermediary role, as a broker of information between the state program and the ultimate busi- ness participant. Of course, bankers can only function in this role to the extent they are willing to act as inter- mediaries and also to the extent that they are knowledgeable of the financial assistance pro- gama, Willingness to act as an intermediary will probably be motivated by a mix of both self-inter- est and a sense of responsibility to the community: self-interest in the songe that the banker may be able to secure a part of the project for the bank; re- sponsibility in the sense that the banker may perceive a longer-term goal of assisting business and economic development efforts by passing along information to potential beneficinries of state programs. Itis equally important for the beneficiaries of the programs, the businesses themselves, to have al least a minimal level of knowledge of state
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financial assistance programs. Businesses should be aware of the alternative forme of financing available and also where to receive more infor- mation concerning these programs, Survey Methodology Just how aware are bankers and businesses of étate financial assistance programs? A telephone survey Was conducted in October 1991 by the Center fur Economie and Management Research at the University of Oklahoma in order to address this question, Interviewers asked to speak with financial officers of Oklahoma manufacturing es- tablishments and loan officers al Oklahoma banks. Manufacturers were singled out in this Study because they are the most likely recipients and the targets of the stale programs. Access to state financial assistance programs may not be critical for survival or future expansion for many manufacturing establishments that are large enough to tap into national markets for capital.) On the other hand, very small firms may not be able to generate net income sufficient for loan repayment; many of these firme may not sat- isfy the requirements of the loan programs, Firms for which these programs are probably moat useful and relevant ave those that are pol too large and not too small. This issue of relevant size of the targeb firm was addressed by choosing manufacturers that. haye approximately 10 to 400 employeus. Bach of the firms in this group was given an equal prob- ability of selection, From a aample of 467 firma, in this size vange, 64 refused to be interviewed, an aceoplance rate of 86 percent. The 403 firms con- sist of 249 durable goods and 158 nondurable goods manufacturers; these establishments ac count for roughly one-fourth of the manulacturing establishments in Oklahoma between 10 and 400 employees in size. ‘The sample of banks was drawn in « some- what different manner, Por the purposes of this study, banks are viewed as a channel of informa- Hion—a link between state financial assistance programs on the one hand and manufacturing firms on the other, The more loan officers at. a hank, the greater the potential flow of information to client businesses, including manufacturers. Therefore, banks with several loan officers should be given a higher probability of selection in the sample than those with few loan officers. Asset size of the bank was used as a proxy, or substitute measure, for the number of loan offio- a2 ers ata particular bank, Banks with relatively large assets were given a high probability ofselac- tion and smaller banks were given a smaller prob- ability. From a sample of 224 banks, 207 loun of- ficers agreed to interviews, an acceptance rate of 92 percent. The number of loan officers agreeing to an interview represent nearly half the operating banka in Oklahoma and 65 percent of the assets of all banks in the state, Expectations for the Future Both bank loan officers and financial officers in manufacturing establishments are reasonably optimistic about the future, as indicated by ex- pedted volumes of bank loans and sales (Chart 1 and Chart 2), Approximately one-third of loan of- ficers expect to increase the dollar volume of loans during the coming year, with nearly half (48.8 percent) indicating that they will approve about the same dollar amount of loans as in the previous year, Only 18.4 percent of loan officers expect a decline, Loan officers in larger bunks, with assets of $60 million or more, are somewhat more optt- mistic: 36,6 poreent expect to increase the dollar yolume of loans, compared with 29,0 percent of their counterparts at smaller banks. As for manufacturers, more than half the fi- nancial officers at Oklahomin manufactaring es- tablishments expect to increase the dollar yol- ume of sales during the next twelve months, with approximately one-third expecting sales to remain about the same. Little difference cun be distinguished between small and larger manufac- turers, but establishments that produce nondu- rable goods are somewhat more optimistic than du- rable goods manufacturers, The availability of loans and credit is very important for the eurrent operations and expan- sion plans of Oklahoma manufacturers.2 As for the availability of credit in Oklahoma, 27.6 per- cont of manufacturers in the sample believed that credit. is very senree; with more than one-third perceiving eredil as somewhat scaree (‘Table 1). The greatest concern regarding availability of eredit appears to be in the smaller firms with 10- 25 employees; 30.4 porcent of the firms perceive crodil. as very scarce Compared with 24,9 percent in the larger establishments with 256-400 employ- Pes, Thus, nearly two-thirds of manufacturers per- cvive credit as ot least somewhat scarce in Okla- homa, 'Iheae establishments could potentially benefit from state financial assistance programs.
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— — — — —$ CHART 1 Bank Loan Officers’ Expectations Regarding Twelve Month Loan Volume (Beginning October 1991) Percent increase [JJ AbouttheSame Decrease 60 oan 48.8 50 45.5 40 32.8 29,0 90 19.0 18.4 20 104 o4 Less than $60 Al loast $60 Total Value of Assets (Million) Awareness of State Financial Assistance Programs - Summary of Survey Findings Loan officers and financial officers were asked to indicate their level of awareness of several state financial assistance programs, Choices for the re- spondents included "Very Aware", meaning that the person has knowledge of some of the details of the program; “Somewhat Aware”, defined as aware of the existence of the program; and "Not At All Aware", indicating no knowledge, or aware- ness, of the program, Nearly all bankers (92 percent) contacted by the survey team are either very aware or some- what aware of the existence of state financial as- sistant programs, Just 36 percent, however, indi- cated that they are very aware (Chart 3). 45 By contrast, awareness of the existence of state government financial assistance programs is far lower among manufacturers; only 69 percent are “Very Aware” or “Somewhat Aware" (Chart 4). Very few (21.4 percent) consider themselves very aware of the programs. Remarkably, 31 percent of manufacturers responded “Not At All Aware” of the existence of these programs, ‘lhe relatively low level of awareness holds true for both small and large manufacturers of both durable and non- durable goods (Chart 4). Awareness levels of individual programs vary considerably, More than half the loan officers are very aware of the Linked Deposit Pro- gram, with 20-40 percent very aware of the Oklahoma Industrial Finance Authority (OIFA),
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CHART 2 Manufacturing Financial Officers' Expectations Regarding Twelve Month Sales (Beginning October 1991) Increase oO About the Same | Decrease 1B Y4 G4 “Gl Al Ol @| Gg AMA Y (ODFA), and the Economic Development Finance Program. Fewer than 11 percent of the loan offic- ors are very aware of either the Export Financing Program or the Capital Resources Institute. Tn contrast, fewer than 26 percent of the fi- nancial officers in Oklahoma manufacturing es- tablishments are very aware of any of the indi- vidual programs (Chart 4), The financial officers are least familiar with the Linked Deposit Pro- gram-and the Capital Resources Institute and most familiar with the OFA and Economic De- velopment Financing Program. The following sections detail the level of awareness of bank loan officers and financial officers in manufacturers to various programs Ad Manufacturing Financial Officers Regarding the Scarcity of Credit (percent) Manulacturer Size by Employment Type wa CREA. Response 10-25 25-400 Durable durable Total Gredil vary scarce 04 24.9 Credit somewhat scarce 33.3 39.8 Credit available 36.3 35.3 289 2.5 27.6 369 359 368 a4 38.6 35.8
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including the Oklahoma Industrial Finance Authority, Oklahoma Development Finance Au- thority, Linked Deposit Program, Economic De- velopment Finance Program, Export Financing Program, and the Capital Resources Institute.4 Oklahoma Industrial Finance Authority Established in 1960, the Oklahoma Industrial Finance Authority (OIFA) offers loans to manu- facturers, agricultural processors, and recreation and mining businesses. Loans to businesses are made through local agencies typically for a fifteen year period, Interest rates are based on the ageney’s cost of borrowing and may vary according to market conditions subject to a minimum of 8 percent and maximum of 14 percent. Loans from the OIFA are limited to a total portfolio of $90 million; this limit will probably be reached within the next year, A general level of awareness of the Okdahoma Industrial Finance Authority is very widespread among bank loan officers in Oklahoma: 37.8 percent are very aware of the OLPA loan program and 49.8 percent somewhat aware, Of those who are very aware, 59 percent had participated in projects funded by the OIFA during the past five years, More loan officers at the larger banks are aware of the OIFA than those at smaller banks: 48 percent are very aware compared with just 27.3 percent of those at the smaller banks (Table 2). Tn order to determine the level of knowledge of some of the details of the program, the 86 loan officers who are somewhat aware of the OIFA were asked two additional questions. Of these, just 29.7 percent are very aware that the OIFA provides real estate and equipment loans through industrial de- velopment agencies to manufacturers, agricultural processors, and recreation and mining facilities, CHART 3 Loan Officers’ Awareness of State Financial Assistance Programs Bl Very Aware Percent Somewhat Aware 100 90 80 70 60 50 40 30 > 20-4 10 + o- State Linked Oklahoma Programs Deposit Industrial In Program Finance General Authority Oklahoma — Economic Export Capital Develop, Develop, Finance Financing Authority Program Financing Resources Program Institute
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CHART 4 Manufacturing Financial Officers' Awareness of State Financial Assistance Programs Very Aware Somewhat Aware Percent se) my o 70 60 50 + 40 30 20 10 = 0-4 Stale Linked Oklahoma Oklahoma Economic Export Capital Programs Deposit Industrial Develop. Develop, Financing Resources In Program Finance Finance Financing Program) Institute General Authority Authority Program Notably, 7.9 percent of bankers were not at all aware of this aspect of the OIFA, A similar proportion of these loan officers are very aware with the fact that the OITA offers first and second mortgage loans and also parity loans with banks. However, 24.8 percent indicated that they were not at all aware of this detail of the pro- gram, The results of these additional questions con- firms that those who responded somewhat aware of the OIFA loan program indeed are not certain of the details of the program. Thus, we may conclude that the majority of those who are only somewhat aware of the program probably do not have a clear grasp of what the program does or how it works, Manufacturers are much less aware of the OIPA relative to bankers: just 47.8 percent of inan- 46 cial officers in manufacturing companies are either very aware or somewhat aware of the OLFA lean program, compared yith 82 percent of bankers. Restated differently, 32 percent of the loan officers contacted by the survey team indicated that they were Not At All Aware of the OIPA loan program, Follow-up questions to the manufacturers who are somewhat aware of the OIFA loan pro- gram reveal that approximately two-thirds are at least somewhat aware of the general focus of the loan program (real estate and equipment loans to manufacturers, agricultural processors, and rec- veation and mining facilities). However, fewer than half (46 percent) of this group were at least somewhat aware that the program offers first and second mortgage loans (Table 3),
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— —_ ————— — TABLE 2 Loan Officers' and Manufacturing Financial Officers’ Awareness of the Oklahoma Industrial Finance Authority (percent) Response Very Somewhat Not at Aware Aware All Aware Banks (Loan Officers) Asset Size Less than $60 million 27.3 64.6 84 Greater than $60 million 48.0 35.3 16.7 Total 37.8 49.8 12.4 Manulacturers (Financial Officers) Employment Size 10 to 25 22.2 27.1 50.7 25 to 400 17.6 28,8 53.7 Total 19.8 27.9 §2,2 TABLE 3 Awareness of OIFA Program Detalls Among Bankers and Manufacturers! (percent) Bankers Manufacturers General Focus of Program Very Aware 29,7 18.6 Somewhat Aware 62.4 47.8 Not At All Aware 79 93.6 First and Second Mortgage Loan Program Very Aware 26.7 124 Somewhat Aware 48.5 32,7 Not At All Aware 24.8 549 “Among Those “Somewhal Aware" ol tha OIFA. OKLAHOMA DEVELOPMENT FINANCE AUTHORITY Private sector financial assistance programs at the Oklahoma Development Finance Authority consist of two general types: credit. enhancement programs and conduit financing programs. The credit enhancement program applies the ODFA credit rating to cover a non-rated borrower; bond- 47 holders are guaranteed repayment by the ODFA in the event that the business defaults on the loan. Credit enhancement helps non-rated businesses obtain credit when none would otherwise be avail- able, In addition, the reduced risk to the lender may have the effect of reducing borrowing rates, In the second type of program, the ODFA pro- vides funds to borrowers by acting as a conduit, The Authority sells bonds to the financial commu- nity, then uses the proceeds to lend to Oklahoma businesses. Bankers and manufacturers are less aware of the Oklahoma Development Finance Authority (ODFA) than they are of the OIFA; 76 percent of bankers and 37 percent of manufacturers are ei- ther somewhat aware or very aware of the ODFA, compared with 88 percent and 48 percent aware of the OIFA, respectively (Table 4), Three factors may explain some of the difference in awareness between the OIFA and ODFA, First, the ODFA is a relatively new agency compared with the OIFA, The ODFPA was created from the old Oklahoma Development Agency (ODA) in 1987; by contrast, the OLFA has been in existence since 1960. Sec- ond, the mission of the ODFA and, historically, the ODA, is much more diffuse than that of the OLFA, Moat of the dollar amount of activity by the ODFA (and ODA) has consisted of raising funds for capi- tal spending by state government agencies, Far
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TABLE 4 Loan Officers’ and Manufacturing Financial Officers’ Awareness of the Oklahoma Development Finance Authority (percent) Response Very Somewhat Not at Aware Aware All Aware Banks (Loan Officers) Asset Size Less than $60 million 24.0 52,0 24.0 Greater than $60 million 34.6 40.6 24.8 Total 29.4 46.3 24.4 Manufacturers (Financial Officers) Employment Size 10 to 25 14.8 19.3 65.8 25 to 400 15.6 24.4 60,0 Total 15.2 219 62.9 fewer resources have historically been placed in private sector programs, while the financial re- sources of the OIFA are focused entirely on private sector financing. Third, new private sector fi- nancing programs by the ODFA are not yet well established as compared with the OIFA, Knowledge of ODFA program details does not seem to run deep among bankers and manufac- turers. For example, just 29.4 percent of bankers and 15.2 percent of manufacturers are very aware of the ODFA, In addition, the vast majority of those responding that they are somewhat aware of the ODFA were not at all familiar with the Credit Enhancement Program and Conduit Financing Program, the mainstays of the ODFA program of- ferings for the private sector (‘Table 6), LINKED DEPOSIT PROGRAM The Oklahoma Linked Deposit Program con- sist of two programs, one tailored to small busi- ness and the other tied to the agricultural indus- try. Each program has its own separate cligibility requirements in terms of both the type of business that qualifies and the amount of capital that can be borrowed. Administered by the Office of the State Trea- surer, the Linked Deposit Program maintains de- posits of State funds at participating financial in- stitutions at below market interest rates, The 48 lender may then add up to 5.6 percentage points on loans of these funds to borrowers; the result is a below-market interest rate loan to farmers and small businesses in Oklahoma. Not surprisingly, the Linked Deposit Program is vory widely known among Oklahoma bankers, More than 60 percent of bankers are very aware of this program, with 75.8 percent of loan officers in the larger banks very aware. All but 6,5 percent of bankers are at least somewhat aware of the Linked Neposit Program (‘Table 6), TABLE 5 Awareness of ODFA Program Details Among Bankers and Manufacturers! (percent) Bankers Manufacturers Credit Enhancement Program Very Aware 10.5 W42 Somewhat Aware 31.6 28,1 Not At All Aware 57.9 60.1 Conduit Financing Program Very Aware 84 12.4 Somewhat Aware 39,0 33,7 Not At All Aware §2.6 53.9 ‘Among those “Somewhat Aware" al tha ODFA,
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TABLE 6 Loan Officers’ and Manufacturing Financial Officers’ Awareness of the Linked Deposit Program (percents) Response Very Somewhat Not at Aware Aware All Aware Banks Asset Size Less than $60 million 61.4 32.7 59 Greater than $60 million 75.8 172 7 Total 68.5 25,0 65 Manulacturers Employment Size 10 to 25 8.3 63 85.4 25 to 400 10.9 10.4 787 Total 9.6 8.4 62,1 Awareness of the program is much less preva- ECONOMIC DEVELOPMENT lent among manufacturers, More than 80 percent FINANCING (EDF) PROGRAM of financial officers at Oklahoma manufacturing establishments, both small and large, are not at all aware of the Linked Deposit Program. Very few manufacturers are very aware of this program. Both bankers and manufacturers who are somewhat aware of the program apperr to have a good understanding of its basic purpose, For ex- ample, roughly half of these respondents are very aware that the State Treasurer, through the linked deposit program, offers reduced interest loans through participating banks (Table 7), TABLE 7 Awareness that the Linked Deposit Program Offers Reduced Interest Loans through Participating Banks! (percent) Bankers Manutacturers Very Aware 51.9 47.0 Somewhat Aware 44.4 35,5 Not At All Aware 37 17.6 ‘Among those “Somewhat Aware” of the Linked Deposit Pra- gram. The Economic Development Financing Pro- fram, part of the Small Cities Community Devel- opment Block Grant at the Oklahoma Department of Commerce, has provided financing for busi- nesses in Oklahoma since 1987, In fiscal year 1990, the program provided $2.7 million in loans and equity to the private sector, Manufacturers often participate in this program, and bankers are becoming participants in EDF program projects more frequently, Awareness of this program among bankers and manufacturers is significantly smaller com- pared with that.of the OIFA program, Still, given the fact that the program is relatively new and little has been done in the form of active market- ing, the current level of awareness of the EDF Program among manufacturers is notable. Those responding ‘Somewhat Aware’ of the program were asked whether they know that the EDF provides gap financing in the form of loans and conyertible debt, Just 15.6 percent of these loan officers and 7.0 percent of these financial of- ficers were very aware of this fact (Table 9), indi- cating sparse knowledge of the details of the pro- gram,
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TABLE 8 Loan Officers’ and Manufacturing Financial Officers’ Awareness of the Economic Development Financing Program (percent) Response = Very Somewhat Not at Aware Aware All Aware Banks Asset Size Less than $60 million 17.0 43.0 40.0 Greater than $60 million 33,3 29.4 37.2 Total 25.2 36.1 38.6 Manulacturers Employment Size 10 to 25 14.4 19.8 65.8 25 to 400 20.6 24.0 55.4 Total 17.6 21.9 60.6 EXPORT FINANCING PROGRAM Also managed by the Oklahoma Department of Commerce, the Export Financing Program pro- vides assistance to exporters in the form of insur: ance against non-payment by foreign accounts. ‘The existence of insurance against the risk of nan- payment may assist business in securing Nnanc- ing from a local bank or other financial entity, To be eligible, exporters must have annual sales of $2 million or less during the previous two fiscal years. In addition, the exportable product must have been manufactured in the U.S. with 60 percent domestic content by value," TABLE 9 Awareness of Gap Financing in the Form of Loans and Convertible Debt! (percent) Bankers Manufacturers, Very Aware 15.6 7.0 Somewhat Aware 62.0 43.0 Not At All Aware 32.5 50.0 ‘Among those “Somewhat Aware” of the Ecenome Duvilopmnant Fl- nancing Program 50 ‘The export financing program offers attrac tive advantages to manufacturers desiring to ex- pand sales in foreign markets. Unfortunately, only about one-third of Oklahoma manufacturers are at loast somewhat aware of the existence of the program (Table 10). Interestingly, loan officers in larger banks are much more likely to be very aware of the export financing program than are loan officers in smaller bankers. ‘This modest level of awareness of the program probably overstates the level of knowledge among bankers and manufacturers, For example, those who responded “Somewhat Aware” were asked Whether they are aware that the program offers insurance for accounts receivable for overseas sales, Only about 14.6 percent of this group of bankers are very nware of this additional fact, compared with 11.9 percent of manufacturers (able 11). CAPITAL RESOURCES INSTITUTE Although not a source of financing for busi- nesses, the Capital Resources Institute (CRI) provides training to those desiring to learn about economic development finance in general, and Oklaboma financial assistance programs in par- ticular, According to Oklahoma Department of Commerce literature, the CRI
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TABLE 10 Loan Officers’ and Financial Officers’ Awareness of the Export Financing Program (percent) Response Very Somewhat Not at Aware Aware All Aware Banks Asset Size Less than $60 million 4.0 27.0 69.0 Greater than $60 million 18.6 17.7 63.7 Total 11,4 22.3 66.3 Manufacturers Employment Size 10 to 25 13.9 16.8 69.3 25 to 400 13.2 23.9 62.9 Total 13.5 20.4 66.1 TABLE 11 Awareness of Export Financing Program for Accounts Overseas Receivables! (percent) 4 Bankers Manulacturers Very Aware 14.6 11.9 Somewhat Aware 45.8 38.1 Not At All Aware 39.6 50.0 ‘Among thoae "Somewhat Aware* of the Export Financing Program, ..i8 designed to enhance the skills of those currently involved in economic development, small business assistance programs, SBA (Small Business Administration) develop- ment companies, and chambers of commerce, The program is also designed for accoun- tants, financial consultants and loan officers in banks, § & L's and government agencies that are searching for creatiye ways of par- ticipating in projects, and for better ways of meeting the capital needs of their clients,® Developed and managed by the Oklahoma De- partment of Commerce, the Capital Resourcea In- stitute offers a core curriculum on; * Economic development finance * Business credit analysis * Real estate finance, and * The art of negotiation and deal structuring. These courses are each one week in length. Stu- dents who successfully complete these course and pass a written review will receive certification as an Economie Development Finance Professional (EDFP), a designation sponsored by the National Development. Council. These four core courses are supplemented by a weeklong course on financial assistance pro- grams in the state called the Oklahoma Curricu- lum. This course covers a wide variety of topics, including business plan writing and market re- search, and many financial assistance programs available in Oklahoma, including most of the pro- grams treated in this article, The course also of- fers an overview of state tax incentives available for business, what to expect when applying for a bank loan, and information regarding inventors assistance programs. Awareness of this program is very limited: only 19.4 percent of bankers and 11.0 percent of manufacturers are at least somewhat aware of the Capital Resources Institute (Table 12). Very few responded that they are very aware of the Insti- tute, less than 3.9 percent of manufacturers and 6.5 percent of bankers.
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TABLE 12 Oklahoma Bankers’ and Manufacturers' Awareness of the Capital Resources Institute (percent) Response Very Somewhat Not at Aware Aware All Aware Bankers Asset Size Less than $60 million 20 16.0 82.0 Greater than $60 million 8.9 11.9 79.2 Total 55 13.9 80,6 Manulacturers Employment Size 10 to 26 45 8.4 87.1 25 to 400 34 5.8 90.7 Total 3.9 7A 88,9 SOURCES OF ECONOMIC DEVELOPMENT PROGRAM INFORMATION Information regarding business assistance programs may be distributed and obtained in a variety of different manners, both formal and in- formal. Informal channels for the distribution of information include word-of-mouth communica- tions from persons who have participated in a pro- gram; those who have attended a seminar or con- ference regarding a program; those who read about the program in the newspaper; and those who recall the program from a brief item on the television or radio, More formalized channels in- chide newsletters; periodic mailings to businesses TABLE 13 Awareness of Capital Resources Institute Training in Business Credit Analysis, Deal Packaging and Government Programs! (percent) Bankers Manufacturers Very Aware 20.7 10,3 Somewhat Aware 58.6 55.2 Not At All Aware 20.7 34.5 ‘Among Ihose “Somewhat Aware® of fhe Capital Flosiources Instiute, 62 who may potentially benefit from the program; and other regular communication and outreach activities for targeted businesses and financial in- termediaries. Currently, roughly 80 percent of loan officers and 14 percent of financial officers receive infor- mation concerning these programs on a regular basis, Size of the bank or manufacturer seems to play no role in explaining who does or does not re- ceive information (Table 14), TABLE 14 Banks and Manufacturers Regularly Receiving Information Regarding State Financial Assistance Programs (percent) Regularly Receive information? Yes No Banks Asset Size Less than $60 million 92.0 68,0 Greater than $60 million 27,7 72.3 Manulacturers Employment Size 10 to 25 15.4 84.6 25 to 400 13.4 86.6
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Receiving information on these programs on a regular basis seems to be an important factor in promoting awareness, Nearly half the manufac- turers who responded Very Aware of the existence of'state financial assistance programs also indicated that they receive information on a regular basis. Among those who do regularly receive infor- mation regarding financial assistance programs, the Oklahoma Department of Commerce, Okla- homa State Chamber of Commerce and Industry, and the Oklahoma Bankers Association are the most often-cited sources (‘Table 16), he Okla- homa Department of Commerce and State Cham- ber of Commerce and Industry are particularly important information sources for manufactur- ers; together, they were identified by 73 percent of the 58 manufacturers that regularly receive in- formation, TABLE 15 Information Sources Among Bankers and Manufacturers Regularly Receiving Financial Assistance Information (percent) Source Bankers = Manutacturars Local Chamber of Commerce 113 14.6 State Chamber of Commerce 169 339 Local Gouncil of Government 40 0.0 Community Bankers Association 153 a4 Oklahoma Bankers Association 323 32 Oklahoma Department of Commarce 202 403 Of the 60 bankers who regularly receive in- formation regarding financial assistance pro- grams, the Oklahoma Bankers Association was cited by 32,3 percent, following by the Oklahoma Department of Commerce (20.2 percent), State Chamber of Commerce and Industry (16.9 per- cent), and Community Bankers Association (16.3 percent), Seminars and meetings are an important means of acquiring information, making new con- tacts, and solidifying existing contacts. Nearly half the bankers responded that they had partici- pated in seminars or meetings during which one or more of these programs were discussed, Nearly 30 percent of these 97 bankers recall discussions of 53 the ODFA, 20 percent recall OLFA, and 11 to 16 percent recall diaeussions of the Economic Devely opment Finaneing Program or CDUG, With 26 percent of responses, more manufac- turers recall discussions of the OIFA program than any other, Almost 19 percent recall learning about the Export Finance Program and 13,5 per- eént the Economic Development. Financing Pro- gram. TABLE 16 Participation in Sem|nars and Meatings Regarding Financial Programs (percent) Participate In Seminars? Yes. No Banks Asset Size Less than $60 million 46.0 54.0 Greater than $60 million = 50.5 49.5 Total 48.3 617 Manufacturers Employment Size 10 lo 26 79 83.1 25 to 400 13.9 86.1 Total 15.9 84.1 TABLE 17 Programs Discussed at Seminars or Meetings Attended by Bankers and Manufacturers (percent) Program Bankers Manufacturers Oklahoma Industrial Finance Authority 20.0 26.0 Oklahoma Development Finance Authority 29.8 V6 Economie Developmant Financing Program 11.0 135 Community Development Block Grant 16.1 10.6 Capital Resources Institute Ag 29 Export Finance Program 5.8 183
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IMPORTANCE OF BANKERS FOR THE OKLAHOMA MANUFACTURING SECTOR Capital expenditures by Oklahoma busi- nesses, particularly manufacturers, are critically important in improving productivity, maintaining the competitiveness of Lhe Oklahoma firms in na- tional and international marketplaces, and gener- ating growth of employment and income in the Oklahoma economy. In Oklahoma, manufacturers rely heayily on loans for both capital expenditures and also for current operations expenditures (Table 18). Results from the survey show that manufacturers rely on loans somewhat more for future expansion (equipment, structures) than for current operations. Not surprisingly, banks are a very important source of this financing. Banks are very important sources of financing for 65 percent of manufactur- ers, Smaller manufacturers, with fewer than 26 employees, rely more heavily on banks as a source of financing than do the larger manufacturers (Table 19), Eyen though many manufacturers depend heavily on banks ag a source of financing, fow rely on bankers for information regarding alternative financing mechanisms, such as government fi- nancial assistance programs. As shown in Table 20, only 13.8 percent of manufacturers are heavily yeliant on banks as a source of this information; with just 18.4 percent are moderately reliant, The remaining 68 percent of manufacturers do not de- pend at all on banks for information regarding these state financial assistance programs. We may include that this potentially impor- tant channel for information on state financial as- sistance programs, Oklahoma bankers, is far from well utilized. Few manufacturers are receiving information on these programs when they discuss their finaneing needs with bankers. ‘There re- mains the question of why does the flow of infor- mation appear to breaks down at this point? Severul answers to this question are possible, First, bankers may not themselves be familiar enough with state financial assistance programs to offer adviee to a business regarding « particular program. We have seen that.only about one-third of bankers ave very aware of state financial assis. tance programs in general, Second, bankers may feel that their role is to evaluate projects on the basis of potential risks and rewards from the perspective of the financial goals of the bank, not (o act as an information bro- ker regarding government financial assistance programs. According to this perspective, taking time to learn about stute government programs und devoting effort to assisting 4 business explore government financing options may not result in direct benefits to the bank and uses time that could be pat to better use elsewhere. TABLE 18 Importance of Loans to Manufacturers (percent) Manufacturer Employment Size Response 10-25 25-400 Total Financing Currant Operations Very Important 41.8 49.0 45.4 Somewhat Important 22.9 12.4 17.6 Not At All Important 35.3 38.6 37.0 Financing Future Expansion Very Important 59.2 51.2 55.2 Somewhat Important 18.4 15.9 17.2 Not At All Important 22.4 92.8 27.6 64
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TABLE 19 Importance of Banks as a Source of Financing for Manufacturers (percent) Manutacturer Employment Size Response 10-25 25-400 Total Very Important 68.8 619 65.3 Somawnhat Important = 11.4 14.4 12.9 Not At All Important 19.8 238 218 Third, manufacturers may simply not asl bankers to explain alternative financing sources to them or to refer to someone who does know, As we have seen, 80 percent of manufacturers responded that they ave not at all aware of these programs. A financial officer in a manufacturing firm who does not know that these programs exist most likely will nol ask « banker to explain the pro- grams, ‘Thus, manufacturers may not be asking bankers to provide this information, All three of these possible explanations of the breakdown of information Mow between banker and manufacturer has some validity, but none on its own offers a complete picture. A combination of the three may bring us closer to the truth, STRUCTURING STRONGER INFORMATION LINKAGES We know that a general level of awareness of certain financial assistance programs is wide- TABLE 20 Reliance on Banks as Sources Regarding Financing Alternatives (percent) Manufacturer Employment Size Response 10-25 25-400 Tolal Heavily Reliant 164 109 13.6 Moderately Reliant 16.9 19.8 18.4 Not At All Reliant 66,7 693 68.0 55 spread among bankers and manufacturers. Most bankers and manufacturers are al least somewhat aware of the OFA, for example. In addition, relu- tively large proportions of bankers and manufac- turers are at least somewhat aware of the ODFA, Economic Development Financing Program (CDBG), and the Export Financing Program. We also know that the level of awarencas of the details of these programs is much less wide- spread, Fewer than 21 percent of manufacturers, and With the exception of the Linked Deposit Pro- gram, 40 percent of bankers, are very aware of these programs. In addition, we know that only a small proportion of either bankers or manufacturers regularly receive information regarding these programs. However, of those who receive infor mation, the Oklahoma Department of Commerce, Oklahoma State Chamber of Commerce and In- dustry, and the Oklahoma Bankers Association are most often mentioned as the sources, We may conclude that the breadth of aware: ness of these progvams is respectable, but the depth, ov degree, of knowledge of these programs needs improvement. More bankers, especially, should be very aware of the details of these pro- grams, since they ave an important point of con- tact for businesses secking credit and assistance, In addition, a mechanism for regular divect communivation with bankers and manufacturers regurding these programs should be established, Direct, telephone calls or letters to targeted bank- ers and manufacturers would be useful for the purpose of soliciting the top potential projects, This type of direct communication would also serve as an important signal to bankers and busi- nesses that the state government is serious about improving communications. A federal program that assists businesses that have been affected by import competition has used this direct contact technique in Oklahoma with some success, The Southwest Trade Adjust- ment Agsistance Center (TAAC) provides a wide variety of technical assistance to businesses that have beon impacted by competition from imports, The TAAC mailed brief two-page questionnaires to a targeted set of manufacturers in Oklahoma in order to locate businesses that may qualify for their services, To date, the TAAC is working with two-dozen budinesses in Oklahoma that were identified in this manner, Bankers are an important potential channel of information reyarding state financial assistance
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programs. Bankers are in a position to help manufactnrers structure the type of financial packiuges best suited to the needs of the business. Of course, this facilitating role only succeeds to the extent that bankers are well-informed regarding financial assistance programs and to the extent that manufacturers rely on bankers as a source of information, Bankers must be more involved in the process of the distribution of information regarding these programs, It is quite likely that lack of knowledge of state financial assistance programs effectively discourages some bankers from offering advice or referrals regarding these programs. Such intermediary and referral services may nol necessarily result in direct benefits to the bank but could help promote economic growth in the longer term and, indirectly, improye the strength of the bank. It is true that time used to assist a client explore alternative financing strategies may not always vesultin business for the bank. How- ever, improving the quantity and quality of infor- mation available to a client will improve the chances that Lhe best projects ore considered and funded by the slate government finangial assis- tance programs. A good project that oos unfunded duc to # breakdown in the Now of infor- mation is o loss of jobs and income, constituting an inefficient use of public financial resources. Finally, the manufacturer must bear a portion of the burden for any breakdown in communica- tion. Lt is astonishing to learn that.30 percent of these manufacturers are not at all aware that the stale government offers a variety of financial as- sistance programs to the private sector. Ovea- sional coverage of Lhese programs in the business sections of the loca] newspapers provides a mod- ost degree of exposure even for an irregular news- paper reader. NOTES 'Vhe authors ave indebted to David Hinkle, Oklahoma Dovelopment Finance Authority, for this point. 56 "Evidence on this point from the manufacturers ques- Hionnaire is discunned below. 4A vory brief explanation of these programs is offered in the following sections, Readers desiving more infor mation regarding the details of the programs are re- ferred to Larkin Warner and Stephen Smith, “State Government Provision of Business Finance in Okla- homa,” State Polley and Econamie Develapment, 1991, ‘Oklahoma Department ofCommearce, Mxport Finance Program, cirenlar, ‘Oklahoma Department of Commerce, The Oklahoma Capital Resources Inatitute 1990 Curriculum, 1990, REFERENCES Kozak, Ron, “Tumultuous Times: A Coming of Ago," Oklahoma Forum, May 1991, Meeker, Larry G. “Development Finance: Doing the Undonble Deals," Tha Journal of Commercial Bank Lending, Vol. 72, No, 11, duly 1990, Oklahoma Department of Commerce, 1990-91 Curricu- Jam, Capital Resources Institute. Oklahoma Department of Commerce, “Export Finance Program,” pamphlet. Oklahoma Department of Commerce, Capital Re- sources Update, July 1991, Oklahoma Department of Commerce, A Guide to Okla- home Capital Solirees, October 1990, Oldahoma Development Finance Authority, Annual Report for FY 1990, Oldahoma Development Finance Authority, Ausiness Plan for FY 92, Draft, dune 1991. Oklahoma Industrial Vinanee Authority, Annual Re- port 1990. Oklahoma Industilal Finance Authority, Hour Year Polivy and Business Plans FYE 1990 through PVE 1994. Warner, Larkin ind Stephen Smith, "State Government Provision of Business Finance in Oklahoma," Stace Policy & Economic Development in Oklahonva: 1991,
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CHAPTER IV Kent W. Olson Donald A. Murry THE 1990 CLEAN AIR ACT AMENDMENTS AND THEIR IMPACT ON OKLAHOMA O n November 15, 1990, President Bush ap- proved the Clean Air Act Amendments (CAAA) of 1990, ushering in sweeping changes in the nation’s plans to clean up its air. No state will be left untouched by this action, but the impact of these amendments will not be uniform across the various states. Thus, there is a need for studies focused on particular states. This study focuses on how Oklahoma is likely to be affected by certain portions of the CAAA: * new provisions for changes in motor vehicles and fuels, * revised regulations for ground-level ozone and carbon monoxide, * new regulations for toxic air pollutants, * new approaches to control emissions (sulfur dioxide and nitrogen oxides) that cause acid rain, and * anew program for operating permits. The CAAA also contain provisions for controlling particulates, offshore sources of air pollution, stratospheric ozone, and tough new sanctions for those who fail to comply with the Clean Air Act, as amended. We omit these features because they are relatively unimportant problems in Okla- homa or that they will have little impact on the state’s chances for economic development. We have organized this paper in sections cor- responding to principal provisions of the CAAA, Each section contains a brief description of the problem or problems addressed by the CAAA and the problem-solving strategy provided in the amendments, the relevance of the problems and strategies for Oklahoma, and state policy options. Kent W. Olson is Professor of Economics at Oklahoma State University, Stillwater, Oklahoma. Donald A. Murry ts Professor of Economics at the University of Oklahoma, Norman, Oklahoma. 57 MOTOR VEHICLES AND FUELS The Problem Motor vehicles contribute heavily to a variety of air pollution problems. In 1986, they accounted for over 70 percent of the carbon monoxide (CO) present in urban air sheds. They also produced 43 percent of the country’s airborne nitrogen oxides (NO,) and one-third of its volatile organic com- pounds (VOCs), NO, and VOCs combine in the presence of sunlight to produce ozone, a bluish gas that is harmful to people, plants, and physical substances when present in excessive amounts near the earth’s surface. NO, is a precursor of acid rain, and VOCs contribute to over half of the nation’s toxic air pollutants. The discouraging aspect of this problem is that it still exists after more than two decades of governmental efforts to reduce pollutants attrib- utable to the internal combustion engine. Be- tween 1970 and 1987, however, the volatility of gasoline increased by more than 20 percent as re- finers substituted various chemical compounds for lead to keep octane ratings at acceptable levels. These compounds significantly increased emis- sions of VOCs and CO. In the meantime, re- searchers discovered major losses of VOCs from refueling and from gas tank heating which occurs during vehicle operation. EPA studies also showed that catalytic converters deteriorate rapidly after 50,000 miles, and that existing vehicle inspection and maintenance programs often are ineffective. Finally, there was a steady growth in the number of vehicles, vehicle miles traveled, and urban con- gestion. Cleaner Vehicles. To address these prob- lems, the 1990 CAAA require both cleaner vehicles and cleaner fuels. Starting in 1994, new cars must emit about 30 percent fewer hydrocarbons and 60 percent less NO, than they do today. The useful life of emissions control equipment, such as the catalytic converter, must increase from 50,000 to
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100,000 miles. Vehicles must also be equipped to recycle vapors that now escape from the gas tank during refueling and to prevent evaporation of gasoline trom vehicles on hot summer days. Cleaner Fuels, 1 Ue fuels area, vefiners are required (o achieve reductions in gasoline volatil- ity beyond those achieved since the volatility re- duction program was initiated in 1987, Starting with the winter of 1992-93, oxygenated gasoline must be sold in cities with excessive CO, and far- ther gasoline reformulation is required starting in 1996. Finally, the nation’s most polluted cities must slowly inereage their reliance on alternative fuels, such as methanol, compressed natural gas (CNG), liquid petroleum gas (LPG), and electric ity. The Oklahoma Connection The average new car owner in Oklahoma will pay an additional $200 or so for the increased du- vability of catalytic convertors and yapor recovery system modifications! Motorists will pay one to three cents more per gallon for gasoline with lower volatility? plus an additional nickel if they buy oxygenated fuel? The CAAA does not require gasoline retailers in Oklahoma to sell oxygenated fuel, but the state has the authority to require such sales as a means of veducing wintertime CO emissions and summertime ozone, Oxygenates. Currently, only two percent of the nation’s gasoline supply contains oxygenates, Over a fourth of the gasoline supply must be oxy- genated by October, 1992, simply to meet the de- mind in eities required by the CAAA to sell oxy- genated fuel.4 Chances are that state logislatures will add other cities to this list and further in crease the demand for both oxygenated gasoline and methyl tert-butyl ather(MTBE) and other fuel oxygenates, Industry experts believe that this will spur some modification of existing refineries and the construction of new MTBE production fieili- ties, Oklahoma will benefit from this activity to the extent that pew in-state rolining capacity is built to serve the growing market for oxygenated fuels especially in other states. A quick expan- sion is out of the question though; new projects will probably take several years from inception to operation.® CNG. Oklahoma js not a major locus of refin- ing activity, however, and its besl bope for eco- nomic development stimulated by fuels production lies with alternative fuels, especially with CNG ONG has some distinct environmental advantages over gasoline and other alternative fuels such aa methanol and methanol blends? and Oklahoma has the resources und expertise to be a major supplior of this fuel. There are significant im- pediments, however, to widespread and rapid conversion to CNG. Engines must be retrofitted, CNG tanks require more space than gasoline tanks, refueling is significantly slower, and there is no network of refueling stations, Still, many in Oklahoma, including gas company officials and politicians are bullish on the state's long-run prospects for CNG as stimulus to gas consumption und development of the necessary infrastructure.® Unfortunately, the CAAA will do very little to speed the adoption of CNG asa motor fuel, In fact, the rush to meet the legislation-ereated demand for oxygenated fuels may divert vesearch talent and financial capital that would otherwise aid CNG development, State Policy Options Refinery Permits, Given the strong demand for fuels oxygenated with octane-enhancers such as MTBE, special financial assistance by the state seems unnecessary, Perhaps the chief need may he far state regulatory authorities to facilitate the permitting process associated with refinery modi- fication and expansion necessary to meet this de- rand, CNG Assistance. With the Governor's and logisiative support, Oklahoma as a state is in- vesting in the development of CNG as an alterna- tive fuel? The Oklahoma legislature provided tax credit ineentives for the private sector and no in- terest louns for the public sector for the conversion of gasoline vehieles. There are four firms that spe- cialize in vehicle conversion, three retail CNG outlets operated by major gasoline companies, a ONG refueling station on the ‘Turner Turnpike, twenty private flect refucling’stations, the nation’s largest CNG-fueled school bus fleet (Tulsa), and a leading manufacturer of public vehicles (garbage trueks and school buses) powered by ONG only. The state Vortech system provides training for ONG technicians, and the state provides a tax credit for expenses associated with converting ve- hicles to CNG and for refueling compressors, State government may wish to reinforce the dev velopment of this fledgling industry by converting 4 large part of its own fleet of vehicles to CNG or lo gasoline plus CNG,
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Reportedly, Senators Boren and Nickles will be pushing for federal tax credits to encourage in- vestments in clean fuel (CNG, LPG, and liquid natural gas) conversions, clean fuel dispensing fa- cilities, and new vehicles made to run on these fu- els.) These credits may help to offset the artifi- cial adyantago created for oxygenated fuels by the mandates in the CAAA, Governor Walters has argued for a large increase in the federal excise tox on gasoline, Such an increase would be an effec- tive means of making motor vehicle users pay for the environmental damage they create; it would also make CNG (which produces lower environ- mental costs) more competitive with gasoline, The converson to ONG will increase the de- mand for Oklahoma's natural gas benefitting all sectors of the domestic gas business. The Ameri- can Gag Association has estimated that the in- crease in natural gas demand as a result of the CAAA's stimulation of the use of CNG could be only 4,3-5.4 billion cubic feet by 1995, but, move importantly, it could reach 1,030 billion cubic feet by 2006.1! URBAN AIR QUALITY The Problem Sixty percent of the U, S, population lives in areas that fail to meet Hational ambient air qual- ity standards (NAAQS). Ninety-six cities have excessive levels of ozone, 41 fail to meet the earbor monoxide (CQ) standard, and 72 violate the stan- dard for particulate matter, Ozone, a primary precursor of smog, is & pole aonous form of pure oxygen created by sunlight acting on NO, and VOCs. ‘Thirty percent of VOCs enme from point sources (large stationary sources that use hydrocarbons in processing or produc- tion), 20 percent from area sources (amull emit- ters, such as dry cleaners, print. shops, and surface couters), und 60 percent from motor vehicles, Seventy percent of CO comes from motoy ve hicle emissions, and over 70 percent of particu- lates comes from power plunts, industrial boilers, und other industrial processes, CO interferes with the oxygen carrying capacity of blood and may thveaten fetal growth and development. Partien- lates can carry heavy metals and cancer-causing organic compounds into Lhe most sensitive areas of the lungs, increasing the incidence and severity Of respiratory diseaxea, 59 Government regulatory agencies focus their efforts on areas that do not meet the NAAQS - the so-called nonattainment areas. The CAAA of 1990 distinguish several categories of nonattainment, according to the degree to which the NAAQS are violated. More stringent control strategies are re- quired for areas in more serious violation of the federal standards, States are given more time, however, to solve the more severe noncompliance problems. Ozone, The CAAA specify five nonattain- iment categories for ozone: marginal, moderate, serious, severe, and extreme. These areas are lo- cated primarily cast of the Mississippi River and in California. ‘The exceptions ave Kansas City and Lake Charles, Louisiana (marginal), Dallas and Salt Lake City (moderate), Beaumont, Texas and E) Paso (serious), and Houston (severe), Attainment deadlines range trom November, 1993, for marginal areas, to November, 2010, for Los Angeles - Riverside - Anaheim, the only area in the extreme category, While in nonattainment status an aren must satisfy certain “offset” provi- sions: for each permitted unit of additional ermis- sions (from, say, new facilities or expansion af ex- isting facilities) existing emissions must be re- duced to a greater extent. This “olfeet ratio” ranges from LL to 1 for marginal areas to L.6 to 1 for Los Angelos—Anaheim-Riverside, New sources must also satisfy technology standards reflecting tho lowest achievable emission rate (LAER). *Majoc" sources of VOCs and NOx in nanat- tainment areas must install reasonably available control Lechnology (RACT), Prior to the CAAA of 1990 a major source was one that emitted 100 tons per year or more, The 1990 amendments keep this definition for marginal and moderate ureas, but require RACT for smaller sources in the other nonattainment categories, Specific additional requirements pertain, de- ponding on the ozone nonattainment category, as set forth below for Oklahoma, Carbon Monoxide. There ave only two eat- egories for CO nonattainment areas: moderate and serigus, The atlainmont deadlines for these areas are December, 1995, and December, 2000, respectively, Given that motor vehicle emissians are the primary sources of CO there are no offset dnd LAER provisions - bath of which apply to sta- tionary sources of VOCs and NOY, All moderate areas must inventory emissions, set up vehicle inspection/maintenance programs, and make
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oxygenated fuels available, Some moderate areas may have to prepare forecasts of yehicle miles traveled and adapt enhanced inspection/mainte- nance programs. Serious areas must take all the Actions required for moderate areas and institute transportation control measures that offset growth in vehicle miles traveled, The Oklahoma Connection ‘There are no areas in Oklahoma currently on the nonattainment lists for ozone, CO or particu. lutes. The EPA removed Tulsa and Oklahoma Gity only in 1990, however, from the ozone and CO nonattainment lists. Tulsa came very close to making the ozone list last. summer, and Oklahoma City also experiences significant levels of oxone!® although Tulsa's problem has been better publi- cized, Oklahoma City officials seem more con- cerned that their area will slip back on the CO nonattainment List, Compliance Requirements. Should these cities become marginal ozone nonattainment ar eas, they will be required to tale several actions, First, they will have to provide for more thorough vehicle inapection and maintenance programs, Second, local gas stations would probably be re- quired to install vapor recovery equipment. on all gas pumps, hind, many stationary sources of VOCs could be required to install RACT, Among these sources are printers and publishers, dry cleaners, hydrocarbon storage facilities, chemical manufacturers, oil refineries, rubber and plastics manufacturers, ind surface coating operations. Fourth, new firma ov existing firms planning to expind or change processes would have to obtain offseta ina 1,1 to 1,0 ratio, and meet LAER stan- dards, aa well. Finally, should the areas fail to achieve attainment, within three years, they would be bumped into the “moderate” category where evon more stringent vegulations apply. Should Oklahoma City become a CO nonat- tainment area, an enhanced yehicle inspection/ maintenance program will be required, and gas stations will have to install vapor recovery equip- ment on pumps. Failure to comply on schedule would land the city on the “serious” list, triggering the application of more restrictions, inchiding trip reduction ordinances. Compliance Costs (Ozone), Going hack on the dirty air Hist could be costly. Tulsa officials es- timate that the city would need at lwast five new vehicle inspection stations, ‘hese would cost $3.4 60 i million to build and $6.4 million annually to oper- ate, Motorists would have te pay as much as $38 for each inspection, up from the current $5.4 Be- tween 20 and 95 percent of the vehicles inspected would require repairs ayeraging from $70 Lo $100 per vehicle.15 In addition, the CAAA would re- quire gasoline stations in the Tulsi area to install stage-two vapor recovery equipment al a cost of $2,000 per pump, or $12.25 million for the entire avea.® Such equipment increases the time, and thus the real cost, to motorists of refueling, A return to nonattainment status would also mean that stationary sources of NOx and VOCs would haye to install RACT. A detailed study would be required to accurately determing the cost. of RACT for Tulsa (or Oklahoma City). Batimates of the effectiveness of RACT in removing VOCs, relative to inspection/maintenance and stage-two recovery equipment, and the cost of each tech- nique per ton of VOCs remoyed,!7 indicate the cost. of RACT, alone, would be as much as inspection/ maintenance and atage-two recovery equipment combined. Perhaps the biggest concern of all is that a re- turn to nonattainment status would hamper each city’s ability ¢o attract new industry. Tulsa offi- ciala claimed in the summer 1991 that the city could lose 750 potential new jobs from three firms that had put the city on their short list, and that nonattainment could put Tulsa out of the running for the MeDonnell Douglas plant. It ia difficult to ascertain if nonattainment re- lly ia a barrier to location, There are only a few studies of the effect of environment regulations on business location decisions, !® end only one study in whieh nonattainment is examined ou lovation determinant.!® The findings reported in the lit- erature to date indicate that nonattainment, per se, doos very little, if anything, to discourage new business entrants. These findings are limited, however, and they differ so much from the experi- ences cited by local officials, that it would be pre- muture to reject the possibility that nonat- tainment affects business recruiting, Compliance Costs (CO), The costs associ- ated with CO nonattainment are similar in some vespects (o those associated With ozmme nonat- tainment, For example, a stady of Denver's effort to reduce jyinitertime CO indicates inspection/ maintenance coste close Lo those outlined aboye for Tulsa,29 Costa of service station modifications to reduce CO should also be comparable to those as- sociated with ozane reduction.
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The CAAA of 1990 impose no technological requirements such as RACT to achieve CO com- pliance; the CO problem is created by mobile sources, und RACT applies to stationary sources, CO compliance may eventually require trip re- ductions or modifications, however, Such modifi- cations cost 4-5 Limes as much per ton of CO re- moved as inspection/maintenance and stage-two vapor recovery devices,2! Any compliance costs are less objectionable to the degree that the required controls are really needed, here is some question that they are, however. First, there is « good chance that Oklahoma’s ozone problem will diminish as the motov vehicle fleet turns over to inelude more “clean” vehicles and as the vapor pressure of gasoline is reduced further. In fact, the Office of Technology Assesa- ment?2 forecasts that reduced volatility of yasio~ line, alone, should be sufficient to put most cities in the “marginal” ozone nonattainment category back in attainment by 1994, Thos, if Tulsa or Oklahoma City slip into oxone nonattainment, they should be there for such a short period of time that the capital expenditures required by the CAAA of 1990 are unlikely to be a sound invest- ment from their perspective, A better case could be made for these invest- ments if they were effective in reducing pollutants, and these reductiona were a source of significant benefits. The combined effect of RACT, inspection/ maintenance, and stage-two vapor recovery will reduce VOC by less than eight pereent,2* Ac- cording to a recent study in Science reductions of this magnitude are likely to have only a very amall impact on people's health, 24 State Policy Options In view of these facts, it is probably in the state's best interests to reduce the likelihood that either Tulsa or Oklahoma City will slip back into nonattarnment provided that there are relatively cost-effective means of doing so. Volunteerism. One approach is to solivit the voluntary cooperation of owners of mobile and stationary sourcea to change their behavior during periods when conditions are especially favorable to the buildup ofozone and CO. Tulsa has an “Ozone Alert" program which asks people under these conditions, to do things sueh as minimize “cold sturta,” ensure a Light seal on vehicle gus caps, limit driving to essential trips, carpool wherever G1 possible, avoid peak hour trips, and refuel care fully, The Oklahoma City area has a “Clean Air Committee” that is currently spearheading a similar effort to reduce the likelihood af acute epi- sodes of excessive CO. Experience with Denver's Better Air Cam: paign indicates that efforts such as these may have limited success in reducing pollutants.2° To reduce the risk of this outcome the stale may want to undertake additional programs short of those preseribed by the CAAA, Oxygenated Fuel, The most promising al- ternative at present may be requiring the sale of oxygenated gasoline in the summer in Tulsa and in Oklahoma City in the winter. The principal costs of this alternative is an increase in gasoline price and a small fuel economy penalty, Bstimates based on Denver's experience with oxygenated fuels indicates that these costs can be quite amall,26 In Denver they ranged from 0.46 cents to 1.6 cents per gallon, including the price equiva- lent value of the jrapact on fuel economy. More widespread demand for oxygenated fuels will probably drive up these costs, Still, this alterna: tive may compare favorably on the basis of eosts with the voluntary action alternative when all the costs of the latter are considered, e.g., the costs of alternative transportation, inconvenience, the value of "{ree” public-service announcements, and the corporate costs of getting employees te par- ticipate, There is little doubt that oxygenated fuels is a more certain route to reducing actual pollutant emissions. AIR TOXICS ‘The Problem Industrialized eeonomies produce and use lavge quantities of chemicals, chemical com- pounds, and metals, Many of these are toxic to humans and/or the natural environment. The Clean Air Act of 1970 required the EPA to list each toxie or havardous pollutant that wae likely to cause an increase in deaths or serious illnesses, and to establish omission standards for each source of the listed pollutant, In 20 years, the EPA issued standards for only eight toxi¢ pollutants: mercury, beryllium, asbestos, vinyl chloride, ben- zene, ridio-nuclides, inorganic arsenic, and coke byerl emissions, The 1970 law required a yery stringent health standard for toxies. The EPA was unable,
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or unwilling, to find many toxics that would meet this standard, and also withstand a legal ehal- lenge to the underlying risk-benefit assessment required of the agency, Total Releases. In 1988, manufacturing fa cilities reported fi.2 billion pounds of environ- mental (air, land, water) releases and off-site transfers of chemical wastes in the Toxics Release Inventory2? required by Section 318 of the Emer- gency Planning and Community Right-to-Know Act ef 1986, Thirty-nine percent, or 2.4 billion pounds, were gir toxics, As large as these releases may appear, they ure only the tip of the iceberg. The Office of ‘Technology Assessment. estimates that the Toxics Release Inventory amounts for 95 percent of toxic chemical releases because of noncompliance, an~ derestimates, and limitations on the chemicals and facilities subject to reporting requirements.23 Toxics Threat, The 1990 CAAA specify a much less exacting standard for identifying and listing air toxics than was provided in the 1970 Clean Air Act. The latter required the EPA to list those substances that caused or contributed to an Increase in mortality or an increase in serious ir- reversible or incapacitating irreversible illness, Under the 1990 CAAA a substance may be listed if the EPA determines simply that it presents a threat to human health or the natural environ- mont. Toxics List, In addition to providing the EPA with a less exacting-and presumably less litigious ~standard for six toxics, the 1990 CAAA contain a list of 189 toxic substances which must be regu- lated by the EPA aceording to a fixed timetable, This list will be the focus of air toxics regulatory offorts for yours to come. Major Sources, EPA regulation of those toxica begins with identification of the “major” sources; o Major source emits more than ten tons per year of a single toxic or more Uhan 25 tona per year of any combination of toxics. he BPA must then develop technology-based emissions limits for eavh source category. The emissions allowable for oxisting major sources will be those achieved by the cleanest 12 percent. of the sources, or the cleanest five sources if 1 category contains 30 or fewer sources. These standards are normally re- ferred to as MACT standards, where MACT stands for Maximum Achievable Control Technol- ogy, In setting these standards, the BPA must consider not only the pollution control equipment used by existing sources, but also pollution pre- vention methods such as changes in processes, in- puts, or products. New major sources will be subject to more ex- acting standards, They will be required to limit emissions to those achievable by the adoption of LAER (Lowest Achievable Emission Rate) tech- nology, Area Sources. Existing and new “area” sources ~ smaller sources in an ares that combined emit more than ten tons per year of a single toxic or more than 25 tons per year of any combination of toxics~ will also eventually be regulated, ‘They will have to limit emissions to levels achieved by sources employing GACT-Generally Available Control Technology. Presumably, this is a less exacting standard than those based on MACT and LABR technology, States' Role, The states will have the pri- mary responsibility for implementing EPA regu- lations, including operation of the new permitting system (diseugsed below) inspired by the air toxics provisions of the 1990 CAAA. States may adopt their own toxics standards, provided that they are tougher than the federal standards, Advance Compliances, The CAAA attempt to provide an incentive for sources to reduce their toxie emissions even before the EPA sets stan- dards. Sources that reduce toxies releases by 90 percent or more below baseline year releases, or enter into enforceable commitments to achieve such reductions by January 1, 1994, will be given a six-year extension from compliance with MACT standards. Congress is hopeful that this provision will induce an immediate reduction in air toxies, One should not confuse this advance compli- ance feature of the 1990 CAAA to reduce indus- trial toxios with an effort underway before the act, That EPA initiative, known as the “43/60 Pro- gram”, would reduce by one-third the total re- leases, transferring 17 Largel chemicals by the end of 1992 and cutting them in half by 1995. During the first six months of this program, 296 organiza- tions, including 77 chemical producers, signed voluntary commitments to achieve these goals,29 Among the companies are giants such as Buyer USA, Dow Chemicals, DuPont, Bagtman Kodak, and Hoechst Celanese, Other Provisions, The 1990 CAAA also call for (1) studies by the National Academy of Sci- ences and BPA to identify improved techniques for estimating risks to public health from air toxies exposure, (2) a program to assess the health risk from combinations of “aren” sources (for example,
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dry cleaners, print shops, auto paint shops), (3) a program for prevention of accidental releases of air toxics by industrial plants, and (4) a study of air toxics emitted from electricity generating plants. Finally, since the effects of air toxics on health, and the effects on air toxic levels of the application of MACT standards are uncertain, the 1990 CAAA require an assessment by 1996 of the residual risk remaining after the applications of the provisions in the amendments. The findings of this assess- ment could lead to new, possibly stricter, regula- tions, TRI Air Toxics. Table 1 lists the top 20 air toxics, in terms of volume of air emissions, ac- cording to the federal government's 1988 Toxics Release Inventory (TRD, These 20 account for nearly two-thirds of all air toxies reported in the TRI. The TRI covers only toxics produced in manu- facturing. Thus it does not include all air toxies, or even a full accounting of the toxies it does re- port. Some significant underreporting occurs? with respect to the following: * benzene and toluene - total emissions from all sources, including motor vehicles, exceed the total quantity of al/ air emissions re- ported in the TRI, * chloroform—water treatment plants emit five times the amount emitted by chloroform manufacturers, * tetrachloroethylene (perchloroethylene)- only about one-third is reported in the TRI, and TABLE 1 Air Emissions of Twenty Toxic Chemicals 1988 Total Air Toxics Released Percent of Total Chemical (Millions of Pounds) Air Toxics Released Toluene 263,448 10.85 Methanol 215.368 8.87 1, 1, }Trichloromethane 161.675 6.66 Xylene (Mixed Isomers) 140,265 5.78 Chlorine 132,567 5.46 Mathyl Ethyl Ketone 126.121 6.20 Dichloromethane 114,812 4.73 f Carbon Disulfide 82.280 3.99 Hydrochloric Acid 66.216 2.32 Trichloroethylene 46.396 1.91 Glycol Ethers 45.654 1.88 Styrene 33,616 1,38 L) Tetrachloroethylene 31,017 1,28 ‘ Methyl Isobuty! Ketone 29,996 1,24 Benzene 28.289 147 | Chloroform 22.710 0.94 4 Carbonyl Sullide 19.125 0,79 Ethylene Glycol 13,229 0.54 Formaldehyde 12.332 0.51 < Hydrogen Fluoride 11.568 0.48 1586,684 65.36 “denotes carcinogen Source: EPA, Toxies in the Community, 1990, Appendix D. 63
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* formaldehyde-total emissions from all sources are around 1,25 billion pounds, ver- sus the 12.332 million pounds reported by manufacturers. Actually, the TRI includes only 173 of the 189 air toxies specified in the 1990 CAAA. For example, the 1988 'TRI omitted coke oven emissions which was about 105 million pounds, Figure 1 shows the heavy concentration of TRI air emissions in four manufacturing indus- tries; Chemicals (SIC 28), Primary Metals (SIC 33), Paper (SIC 26), and Transportation Equip- ment (SIC 37), The chemical industry alone ac- counted for 31 percent of all TRI air emissions. Other Toxics, Tho EPA's regulation of air toxics will extend far beyond these four industries; indeed, it extends far beyond the nation's manu- facturing sector. Air toxics are produced also in agriculture, mining, construction, transportation, publie utilities, wholesale trade, retail trade, ser- vices, medicine, education and research. The EPA's draft of its air toxies source list5) includes processes and activities from all of these sectors, with special emphasis on the sectors outside of manufacturing that are listed in Table 2. There is no inventory at present of the air toxics releases associated with these sources. Table 3 shows an alternative way to organize the full scope of air toxics sources. These are the categories used by the EPA in developing the source list of the 189 air toxics which must be regulated according to the 1990 CAAA, FIGURE 1 TRI Alr Emissions by Industry Industry by SIC Codes Food (20) Tobaces (21) Toxtles (22) Apparel (23) Lumber (24) Furniture (25) Paper (26) Printing (27) Chemicals (20) Pelrolaum (29) Plastics (30) Leather (21) ‘Stone/Clay (32) Prim, Metals (33) Fat, Motals (34) Machinery (35) Elocvical (36) Transportation (37) Measure/Prota. (38) Miscollangous (98) Mulliple Goden 20-39 No Codes 20-39 400 00 800 Millions of Pounds Source: EPA, Toxics in tha Gomimunity, 1990, 189
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_ — —__—_— —— — TABLE 2 regulations under the air toxics provisions of the 1990 CAAA, Principal Sources of Air Toxics Outside Much of this regulation is likely to be focused Manufacturing by SIC Code on the Tulsa and Oklahoma City areas. Tulsa and Oklahoma counties top the state in terma of total SIC Code Industry releases and carcinogenic releases, respectively, In 1721 Painting and Paper Hangi fact, Tulsa County is among the 100 counties na- 4226 Special (Truck) Warehoueing and tionwide with the largest total releases, and Okla- Storago, N. E.G, homa County is among the top 100 of carcinogenic 4581 Airports and Airplane Services releases, 47 Transportation Services Releases by Industry. 'lable 6 shows the yA pact rel la distribution of total releases and transfers by in- aler Su} dustry in Oklahoma and the U. S, in 1988. Al- al ls eee aac a Herp lalendlndprretit though not identical, the distributions of the U.S, Thode e ane and Oklahoma releases are similar in many ways, 517 Pelralaum and Pelralaum Products. In general, the move important industrial sources Wholesale Trade in the U, 8. tend to be the more important sources 554 Gasoline Service Stalions- Retail in Oklahoma, This suggests that the impacts of 598 Fuel Oil Dealars-Retall the 1990 CAAA air toxics regulations on the 724 Laundry, Cleaning, Garment Services manufacturing sector may be similar in both 7632 cues Top, Body, Upholstering, Oklahoma and the U, 8. en SrVope i ii toxii isi th 7594 Rea Rp hos DD gel dyn apt spo 8221 Collotes and Universities difficult, if not impossible, to estimate because of Regardless of how the sources are organized, it is clear that many types of economic activity produce air toxics. Thus, the air toxics portion of the 1990 CAAA requires the EPA to greatly extend its regulatory efforts. The oxact shape that this regulation will take is not. yet clear. The Oklahoma Connection Oklahoma manufacturing firms provide data on their releases und transfers of toxic pollutante, including air toxics, as part of the EPA's Toxics Rolease Inventory. State-level data on sources outside manufacturing are not available, however, Total Releases, Tables 4 and § provide in- formation on total and average toxics released and transferred in Oklahoma during 1988-the last. survey year for which data have been published by the EPA. They also list Oklahoma's ranking rela- tive to all the other states In the nation, These data suggest that Oklahoma's manufacturing sector is somewhat toxics-intensive relative lo the reat of the states. However, without further study, that observation is inconclusive. In any event, the data suggest that Oklahoma will have many manulae- turing facilities subject to new environmental 65 the large number of source categories and the lack of detailed data on the sources, Neither the EPA nor the state regulatory agencies has a profile of existing technologies complete enough to write the regulations to govern each source, Thus, the im- pacts will be known only after progress in reduc- ing pollution through mandatory measures is as- sessed, Compliance Costs, Vhe EPA estimates that the costs of complying with the air toxics provi- sions of the CAAA will be approximately $7 billion per year by 2005 when the provisions are in full force.52 The EPA has not allocated the costs to the states, however, because source data are relatively incomplete, As a first approximation, the state's share of compliance costs could reflect its share of total TRI air toxics releases and transfers. For example, the 31.1 million pounds of air toxics re- ported by Oklahoma manufacturing firms in 1988 constitutes 1,28 percent of the 2,427.6 pounds re- ported nationwide, Adjusting this pevoentage in order to account for Oklahoma's somewhat more toxies-intensive manufacturing sector, shows in Table 6 a high ranking in terms of releases per worker and re- leases per dollar of value added in. Separate cal- culations indicate a higher ratio of releases to earnings for Oklahoma in eight of the ten most foxics-intensive industries: chemicals, petroleum,
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TABLE 3 Sources of Air Toxics Industry Group Selected Specific Sources Fuel Combustion Metallurgical: Nonferrous Metals Metallurgical: Ferrous Metals Mineral Products Processing and Use Petroleum Refinerios Petroleum and Gasoline Production/Marketing Surlace Coating Processes Waste Treatment and Disposal Agricultural Chemicals Production and Use Fibers Production Procosses Food and Agriculture Industry Pharmaceutical Production Processes Polymers and Resins Production Production and Use of Inorganic Chemicals Production of Synthetic Organic Chemicals Radionuclide Emitters Miscellaneous Production and Use Activities (TRIS) Boilers, Heaters, Turbines, Engines, Fireplaces, Wood Stoves Smelting, Relining, Battery Manulacture Foundries, Coke Ovens, Steel Pickling Brick, Cement, Glass, Asbestos Petroleum Refining Hydrocarbon Transportation and Storage Printing, Coating of Fabric, Paper, Appliances, Buildings, Autos, Furniture Incinerators, Landfills, Water Treatment Insecticides, Fungicides, Fumigants, Herbicides Acrylic, Nylon, Rayon, Triacetate Bakers Yeast, Coffee Roasting, Catton Ginning Pharmaceutical Production Butyl Rubber, Cellophane, Nylon Plastics Production of Use of 28 Chemicals/Compounds Production of 404 Chemicals Coal Combustion, Dept of Energy Facilitias, Uranium Mines 66 Processes or Uses Producers and Users of 72 Toxics Reported by Toxics Release Inventory System Source: Environmental Protection Ageney, 1990, Docurantation for Daveloping the Source Category List, Preiminary Dralt, Otfiea of Alr Quality Planning and Standards, Hesearch Triangle Park, NC, TABLE 4 plastics, stone/ clay /glass, fabricated metals, ma- chinery, transportation equipment and measure- Total Toxic Releases in Manufacturing ment/photo equipment. Given these factors, the in Oklahoma state's share of compliance costs may be as high as 1988 two percent, or $140 million per year out of $7 bil- lion. Amount Rank In recent years, compliance costs have been Released Among leas than four percent of total new investment in adnate Yiealy byl manufacturing, Outlays of $140 million would ac- tes count for a larger share, probably in the eight-ten Total Releases and Translers percent range. (Air, Water, Land) 51.720 31 Productivity Effect, Oklaboma outlay still Tole se Releasad seer va small share of investment spending. Investment Total Air Releases 31.101 oy spending is such a critical determinant of produc- Total Point Source Air tivity, however, and the growth in productivity is Releases 22.453 26 80 important to long-run growth in real income, Total Fugitive Air Releases 8.648 26 that it deserves a closer laok, ‘Source: Gatculutad trom data in EPA, 1 va. Not available in Toxics io the Community, ‘oxies in the Community, There are several reasons why regulation would reduce productivity, First, it may reduce 66
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TABLE 5 Average Toxic Releases in Manufacturing in Oklahoma 1988 Amount Released Rank Among Measure (Pounds) the 50 States Total Releases and Transters Per Reporting Manufacturing Facility 284,178 21 Total Air Releases Per Capita 9.5 25 Total Air Releases Per Square Mile 445 36 Total Air Releases Per Worker in Manutacturing 310 12 Total Air Releases Per Dollar of Value 0.0035 9 Added in Manufacturing Source: Calculated trom data in EPA, 1990, Toxies in the Community TABLE 6 Distribution of TRI Total Releases and Transfers in Oklahoma and U, S. Total Percent of Total Percent of Releases/Transters Transtars/Releases Transters/Releases in Oklahoma in Oklahoma inU.S. Industry (Pounds) Food (SIC 20) 220,991 0.39 1.17 Tobacco (21) 0 0.00 0.24 Textiles (22) 11,000 0,02 0.95 Apparel (23) 0 0,00 0.03 Lumber (24) 54,761 0.11 0,53 Furniture (25) 464,318 0.90 1.01 Paper (26) 2,707,430 5.23 5,93 Printing (27) 20,360 0,04 0.97 Chemicals (28) 18,521,243 35.81 46,20 Petroleum (29) 3,610,698 6.98 1.67 Plastics (30) 2,566,031 4.96 3.03 Leather (31) 0 0.00 0.61 Stone/Clay/Glass (32) 488,734 0.94 0.88 Primary Metals (33) 4,575,740 8.85 13.75 Fabricated Metals (34) 3,177,738 6.14 3.45 Machinery (35) 2,694,835 5.21 1.21 Electrical (36) 744,725 1.44 2.92 Transportation (37) 4,889,754 9.45 418 Measure/Photo (38) 3,391,653 6.56 1,03 Miscellaneous (39) 35,414 0.07 0,58 Multiple SIC Codes 3,528,690 6.82 9.29 No SIC Codes 36,194 0,07 0.37 Source: EPA, 1990, Toxics in Hw Carmmnuniy, Tables 6-1 and 0-8 67
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the productivity of inputs used in production. For example, when a pollution control device on a smokestack limits the Now of air out of an indug- trial heater, that reduces the heater’s efficiency, Second, regulation could reduce productivity hy reducing new investment, or capital per worker. Uncertainty about the exact dimensions of yegulation~a likely response to the 1990 CAAA air toxics provisions—might reduce willingness to in vest in new production equipment, or lead to post- ponement until the regulations are clarified. Also, firms that have to invest in pollution abatement, equipment to meet regulations may do so by tak- ing away funds from investment in new produc- tion equipment, Third, firme may have to devote resources to ensuring and demonstrating compliance with regulations that they could use for production, including the diversion of management effort. Christaingen and Haveman found that ob- served increases in total federal regulation over the 1948-1977 period explained from 12 to 21 per- cent of the 1970's labor productivity slowdown in manufacturing.“ In a more recent study, Gray determined that BPA regulation alone was ve- aponsible for 12 percent, or .17 percentage points, of the productivity alowdown in this sector that ocurred in the 19708,54 In other words, real out- put in the manufacturing sector would have grown 19 percent faster in the absence of EPA regula- tions. Although this may not sound like much im- pact, With a large base level of output and the cu- mulative effect of several years, it. ia significant. For example, real U.S, manufacturing outpul was about $658 billion in 1980 and $868 billion in 1989, The average growth rate over this period was three percent, Had this rate been .17 per- centage points higher, or 3,17 percent, real U, 5. manufacturing output in 1990 could have been $871 billion, or $18 billion higher. In Oklahoma, real manufacturing outpul grew atan annual rate of 34 percent over the 1980-89 period, from $6,534 billion to $8.869 billion. Assuming that this rate continues until L994, when the first of the air toxics regulations are in place, and for ten years thereafter, real manufacturing output. would be $14,628 billion in 2005, If the rate falls to 4.28 percent becuse of air loxics regulations, real manufacturing output would be only $14.39 billion or $288 million lower. The cumulative reduction in outlpul over the 1994-2005 period would be $1,194 billion. 68 These illustrations should be sufficient to make the point that small reductions in produc tivity matter. They do nob. prove, though, that the air toxics regulations will reduce productivity, Gray points out that regulation ean positively affect productivity by stimulating the develop- ment of new production techniques, providing a “shock” to management and forcing inefficient plants to close.4® He clearly believes, however, thal these effects will not outweigh the negative effects of regulation on production. The most serious challenge to the view that air toxics vegulations will reduce productivity comes from those who point out that firms will satisfy air toxics provisions of the 1990 CAAA largely by applying known technology.36 This ia different from many environmental regulations in the past that promulgated standards forcing the development and adoption of new technology, If this is the case, the findings of Christainsen and Haveman®? and Gray®8 overstate the negative effect of the air toxics provisions of the 1990 CAAA, Business Opportunities, Vinally, the CAAA create significant business opportunities in the cleanup. The new legislation will increase the de- mand for pollution abatement equipment and design of pollution abatement and prevention strategies. Michael R, Deland, Chairman of the President's Council on Environmental Quality cites o preliminary estimate of a $228 billion worldwide market for environmental technology annually, growing at five-six pereent per year. Consultants at Arthur 1. Little predict that the market for hazardous waste incineration services could grow at. 20-26 percent a year in the foresee able future.4 Only a few Oklahoma firms, such as John Zink Company of lula, are key partici- pants in this market, but there will be room for new entrants to make an impact. State Policy Options The air toxics provisions of the CAAA ensure that. for the first time thousands of small busi- nesses Will be affected by clean air logislation. Initially, air toxics sources will be regulated if they emit as little as ten tans per year ofa single toxic pollutant or 25 tons of all toxic pollutants combined, Some small businesses ave sure to be included in this group, Eventually, the BPA sill issue regulations for area sources — stationary sources of air toxics that In sum are major
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| sources-bringing a large number of small buai- nesses under the regulatory umbrella. Small Business Assistance. Congress an- ticipated that these firms would often lack the in- house personnel needed to deal with the coming regulations and wrote provisions into the CAAA requiring the states (o provide small business assistance. Under the amendment the slates must establish a Small Business Stationary Source Compliance Assistance Program, This program, funded by fees levied for air pollution source per- mits, will he evaluated by a Compliance Advisory Panol also vstablished pursuant to ihe CAAA, Legislation containing such provisions will be introduved in the 1992 session of the Oklahoma Legislature, A draft of this legistation asks also for the authority to establish a State Ombudsman Office for small business in the Oklahoma Health Department. The Council of Environmental Quality (CEO) specifies factors pertinant for an effective state assistance program:4! * An articulated philosophy or approach; * Sbrategies to engage senior managers and workers al companies; * An array of information servicos including a database, publications, and training: * Capability to conduct on-site audits; * Partnerships with key research jnstitu- tions, universities, and community col- lejos; and * Positive incentives such ag awards, University Partnerships. Tho CEQ recag- nixes that slate resources for such programs are generally limited, and they suggest extending them through partnerships with local universities. For example, Tennessee and Rhode Island have developed successful partnerships. Toxics Legislation. The states must ostab- lish (as explained ina later section), » system hat issues permits to toxics sources. The level of pubs lic nwareness of the air toxics problem will grow over time, however, and, as it does, theve will be a growing demand for more state action. According to the CEQ at least 14 states have passed legisla- tion to limit the use of toxic substances and/or re- duce hazardous waste genoration.!2 For example, Louisiana now has a law mandating 4 50 percent reduction in Loxie air emissions by 1994. If Okla- homa is swept along by this wave, there will be pressure Lo do something in a hurry. os Better Information, Currently, Ollahoma's information on pir Loxics releases is limited pri- marily to what is submitted as part of the TRL As alveady noted, this inventory contains many gaps, and Oklahoma may wish to join states, such as Massachusetts and Minnesota, which now require reporting fom many non-manufacturing sectors, identified by SIC eode, Alternatively, it may wish to require all major sources of toxics to file release reports, The key criterion should be that a release occurs, not whether it occurs through production or use or some particular type of action. Better information also has more than one di- mension, In addition to total yolume, policy-mak- ers should know when peak releases occur and for how long, and how much is typically released dur- ing these periods, More complete information will be needed to satisfy the public's growing awareness of its “right to know" more about toxi¢ pollutants. It will also be valuable in helping public and private entities identify priorities for regulatory review and en- forcement. Over time, the data can be used to track emission trends; the presont data are of in- sufficient duyation for this purpose, State agencies can use the data base to identify priorities for re- view, to sel strategies for controlling releases of specific substances, and Lo focus generally on sourees of conveyn for further investigation, en- forcement action, or both, One outcome of an expanded data collection process will be to help management focus its at- tention on both identifying opportunities and set- ting priorities for pollution prevention or source reduction. Risk Assessment, The obligation on the part of the state to ensure the provision of better air toxics information carries with it an obligation to determine and communicate the significance of that information, The public can easily misunder- stand toxies release information, However, there is not necessarily a correlation between pounds of releases, actual exposure, and the effects on the environment or human health, That is, the raw quantity of emissions, by itself, says little about the resulting risk to health or the natural enyi- ronment. To determine the potential risk, one muat match ambient concentrations with the tox- icity of individual substances and the magnitude und duyation of exposure. Warnings such as these become even more important in an atmosphere conducive to quick political decisions, The approach of the CAAA
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makes good sense; e.g. to require the adoption of existing prevention and abatement technology, and then, after this is done, to conduct an assess- ment of residual risk remaining, New policies are appropriate only if they appear nevessary accord- ing to auch an ex post assessment. Although the abiding stance should be that of waiting until after the EPA implements federal regulations before launching significant state ini- Ulatives, the possible existence of air toxies prob- lems may require move immediate attention. Thus, the state should bu ready to do its own risk assessment. State Facilities, State government services and activities are also important. Florida, for ex- ample opted to convert state buildings to energy- efficient lighting, to join EPA's “Green Lights” program. This action will reduce electricity de- mand in Florida by 200 million KWH each year, reducing the state government's electric bill and sulfur dioxide emissions by 2.5 million pounds.45 Recruiting Targets. The growing interest in air toxies should influence the state’s industrial recruiting targets. Given the prospects for growth of the pollution prevention and abatement indus- try, firms associated with this industry look like good targets. Alternatively, prospects likely to be significant sources of air toxics louk like more questionable Laygets. State Input, One final area deserving imme- dinte attention is that of influencing yet-to- bewritten federal regulations. The EPA is far from issuing specific air toxics regulations, and has shown a new desire to consider input from af- fectod parties in developing these regulations. "The state should take full advantage of the opportunity to provide such input. ACID RAIN The Problem Sulfur dioxide and nitrogen oxides emissions cause acid precipitation Which damages buildings, hurts vegetation, limits the wildlife that can sur- vive in and around lakes, and may affect human health. Title IV af the Clean Air Act Amendments sts forth a revolutionary approach to the redue- tion of the levels of SOg and NO,. As its overall Objective, the legislation targets SOp emission reductions by over 60 percent, approximately a tan million ton per year reduction, that will im- 70 pact electric utilities primarily; it also sets a na- tional ceiling level (at 8.9 million tons annually) and defines 9 program to maintain that level for the future.4? The legislation targets NO, umix- sions for a two million tons per year reduction, Aa a secondary objective, the legislation will encour Age energy conservation, use of renewable energy sources, and development and installation of pol- lution contro! technologies. With the mandated emissions ceiling, in the future, economic development activity that pro- duves S09 emissions can expand only when exist- ing emissions are offset, These limits may hamper future economic growth, sither by placing physical limits on production, or impacting operating costs because of compliance costs. These impacts are particularly important to a state if the standards disproportionately impact that state relative to others, The permissible emission standards apply, of course, to allstates, although the economic impacts will not be equivalent. The Jeyels of required reductions differ arnong industries and states, The ease and enst of’ compliance differs among states, The potential for growth in emitting industries differs. [tis very apparent that there are regional differences ip the impacts of Tile TY, Ttis not yery clear, at this Lime, exactly what these differential impacts willbe, Surprisingly, there is, to date, little evidence of governmental review, at any level, of the regional effects. From the mechanics set forth in the legislation and the emerging regulations, il is apparent that the CAAA will change abruptly the methods of dealing with 80g and NOy emissions, and that the potential economic effects are fairly sizeable. Moreover, the compliance requirements undor Title 1V ave complicated, especially as they apply to 80g emissions.“5 Thus, although the logislation is on: tirely federally mandated, there will be impacts upon state utilities, businesses and citizens, and there will be an important involvement by state government, 80g. During Phase I of the program whieh will begin in 1996, 110 of the highest emitting power plants in 21 states, but. nol Oklahoma, must reduce their S09 emissions to 2.5 pounds per mil- lion BTUs (lbs /MMBTUs), Affected by the age of the generating plants and the fuel used, these plants are mostly concentrated in ten states east of the Mississipp| This standard will lower the overall emissions in the U.S, by ten million ton per year below 1980 levels,
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| | | Phase 1! of the program will begin in the year 2000 for all existing units greater than 25 mega- watts capacity. The legialation requires a reduc- tion in SOp emissions to a level that is equivalent to 1.2 Ibs/MMBTU. In addition, other emitters, such as industrial facilities, may elect to partici- pate in the acid rain program if they choose to do so. Naturally, the more stringent standards will eatch many additional plants in Phase IT including plants in Oklahoma. Autilily can comply with this requirement by installing Nue gas desulfurization equipment (scrubbers), by switching to lower sulfur fuel, such as natural gas, by reducing the offending units level of production, by retiring the unit, by peti- tioning the Environmental Protection Agency (EPA) to aasign the SOg limitations to another unit, ov by acquiring alvaninee through trading with another company,” NO,,. The NOx, emissions program will affect all coal-fired units affected by the Phase Il SOg standards, BPA will issue guidelines and limita- tions for the NO, emission program prior to its effective date in the year 2000. CEM, The program also requires affected utilities to install continuous emissions monitor ing (CEM) systems for S09, NOy and other re lated pollutunts to track progress, ensure compli- ance, and to assure that the administration of the program is creditable,1? Allowances, The BPA will allocate “allow- ances" to Phase land TL affected units in amounts that correspond to the emission limitations. These allowances permit the emission of the proscribed level of SOg. Of course, in reality the affected companies may fail to have enough allowances for their level of emission, or they may reduce emia- sions sufficiently that they have more allowances than emissions, Consequently, the affected com- panies that excoed the required reduction in emissions will generate excess allowances, These exdess allowances may be banked for future use, traded, sold, or leased to another company, and the second company can use these allawances to justify emissions that exceed the limits for its SOy emissions. Through this allocation mechanism, either within the same firm or between firms, the overall emission target. is met, At the and of the calendar year, all affected units must hold allowances equal to the level of 80g emitted during the year. To bring the level of emissions arid the allowances into balance, the wits have until January 30 of the following year 7 Lo complete all transactions and submit them to the SPA for recording.48 The EPA will bank the excess allowances for the following year, If there is an allowance deficiency, the unit must pay a penalty and submit u plan tothe EPA for meeting the standard in the new year, With allowance trading, a firm still has all of the methods used previously under a command and control policy to meet emission standards, plus it also can now ayoid meeting the standard by acquiring allowances from another ofits plants or from other firms, Benefits of Alowance Trading, The «l- lowance trading mechanism will free each of the affected firms so they ean seek the most econorni- cal method to meet both Phase I and Phase II standards, I'he affected companies cnn sel their own rate of omission and then choose the lowest. cost method of meeting that requirement,49 Firms with lower costs of emission control will choose to exceed the standard and generate addi- tional allowances which may be banked for future expansion or sold, The firms with the highest costs of control will find it cheaper to acquire allowances from the lowest cost firms. In this way, the legis- lution, as ils draflers intended, will assure the meelingof the standard, butatthe lowest cost to all of the affected firma, ‘The value of an allowance should be at least equal to the cost of generating the allowance for the lowest cost seller. The buying firms will be at- tracted to purchasing allowances so long as the allowance price, plus the present value of the discounted future allowance prices, is less than the cost ofthe cheapest alternative means ofabatement, Incentives provide further important advan- tage to allowance trading over the previous com- mand and control method, Since the emitters may generate excess emission savings for fulure vse or to sell them, that encourages companios to exceed the standards. It, in turn, encourages firma to always seek the most efficient, manner to control emissions, even beyond the meeting of the princi> pal standard, Thut is, the trading policy will encourage firms to install new teehnologies,even if the firm is in compliance, and it will encourage investment in R&D of control technologies by the affected firms and their suppliers, The Allowance Market. Ifthe market for the buying and selling of allowances is controlled by a small number of the participants in the market, the cost or availability of allowances may be unfair to firms desiring allowances. Firms, including
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cogenerators, and states that do not have direct aecess Lo newly generated allowances have been a concern for planners of this provision from the beginning, And there are reasons to believe that the trading of allowances may proceed leas effi- ciently than hoped, For example, firma with excess allowances may hoard them for future development needs, thereby foreclosing them from firms seeking allowances. Regulators in states with excess al- lowances may encourage the withholding of al- lowances for the domestic development needs of those states. There remains an uncertainty re- garding the efficacy and the fairness of the allaw- ance market, and theve is u possibility that some parties, states or firms, will deyelop an unfair advantage over other states or firms. As one preventive measure in the legislation, the EPA will withhold 2.8 percent of the total allowances and soll them through a government sponsored auction, That will create a bench mark pricing mechanism and a small market, perhaps of “last resort”, for both buyers und sellers, Still the functioning of (hat provision is unclear. The Oklahoma Connection Presently, Oklahoma is in compliance with the requiremonts under the legislation for Phase 1 (until the year 2000), but perhaps more impor- tantly, Oklahoma utilities will not be impacted as heavily as ulilities in other regions. One estimate for the beginning of Phase II predicts 87,228 tons of emissions and 104,667 allowances for Okla- homa,®9 If this optimistic estimate should prave correct, Oklahoma will not havea net deficiency in 0p allowances Wntil future expansion, sometime beyond 2000, cases a short-fall. Of course, esti- males concerning emissions into the next contury are problematical, and even if accurate thoy may diffor among the various utilities in the state, There are at least three areas ofimportance to Oldahomans in Title lV, Firat, thereare important administrative and regulatory requirements for state governments. Second there are potential economic development effects, And third, the natu- ral gas producing sector in Okluhoma could hen- ofit, bul probably only by ayelatively small amount, Regulatory Responsibility, Under the log- islation, the states, including Oklahoma, will take over the responsibility of issuing avid rain permils during Phase I, and must develop a program to do 40. During Phase f of the program, EPA's Regional Offices ave responsible for issuing 72 acid rain permits, For Phase !1, states are required to develop and implement permit programs for approval by EPA pursuant to the general permitting requirements speci- fied under Title V of the Clean Air Act.5! ‘The permitting proceas will provide a uniform accounting of the emissions and controls and pro- mote more effective administration of the Clean Air Act Ainendments.52 Uniform accounting is critical to the functioning of an effective market in allowances and any evaluation of the effectiveness of this market, As discussed more thoroughly in the next sec- tion, Title V requires the states to develop general permit programs by November 1993. Thus, Okla- homa officials will have several years of experience with permitting wher it becomes necessary to permit public ubility emissions of SOg and NOy. The Oklahoma Corporation Commission (OCC) has an important responsibility to imple- ment policies that assist, and at least do nol exac- erbate, the national environmental policies, and that serve Oklahome’s broader interests. On the one hand, the Title IV policies should improve and prevent degradation of the air quality in Okla- homa. On the other hand, the OCC hay an impor- tant role to playin seeing that Oklahomans do not inordinately subsidize the air clean-up in other states. There are twa important issues here. First, there may be a conflict between state economic development and environmental objectives and national environmental objectives, Second, unless the various state commissions handle the regula tory treatment of the effects of the CAAA uni- formly, ‘Title 1'V will work to the detriment of some statos relative to others, The OCC has as an im- poriant role in determining the impact of this portion of the legislation in Oklahoma, Importantly, there may be a conflict between the state objectives and the national policies, and at least some observers have noted Lhat potential gonflict. For example, Bohi and Burtraw haye noted that the ratemaking treatment by commis- sions will affect the utilities’ incentives for com- plying with Title [V.5 Decisions by the Corporar tion Commission, as to the levels of return on the investment in contral equipment will determine the relative attractiveness of abatement and al- lowances, The Commission alsa will determine the trealment of purchased allowances. If allowance plirchuses are expensed by a utility, that will re- duce the utility's investment because that practice
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avoids recovering the investment over time, If the OCC allows a rate of return for abatement invest- ments that is loss than the company’s cost of capi- tal, a utility will seek allowances rather than abatement, The Commission's treatment of capital gains and losses from the holding of allowances may be most important. If allowances appreciate in value, that gain can flow through to stockholders or it can offset the revenue requirements that would otherwise be collected from ratepayers, The same is true for capital losses from the hold- ing of allowances. Although these types of state-agency deci- sions affect the willingness to generate and hold allowances, il is, at this time, virtually impossible to discern the policies in Oklahoma’s best inter- est, If the Oklahoma utilities do not haye the in- centives to exceed the standards when it iv coat effective to do so, they will not generate allow- ances that may be needed for expansion. Economie Development, As the standards are tightened and ifOklahoma falls out of compli- ance, Oklahoma utilities and industries will have to invest in abatement equipment ta meet the standards or to buy allowances, Although it is still hard to predict the cost and availability of al- Jowances, the excess allowances in Phase IT are likely ta come from the creation of allowances by the affected firms in Phase I, The latter will in- stall up-to-date abatement technology, and many observers expect excess wllowances to result.54 OF course, these firms will be from outside the State of Oklahoma, The actual economic effect for Oklahoma is Nard to predict. If the regulatory commissions in other states induce the holding of allowances for anticipated expansion in those states, those poli- cies will advorsely affect Oklahoma.®® A happier outcome would be a flood of low-priced allowances available early in the next century, Natural Gas Impaet All of the Tithe LY effects upon Oklahoma’s aeonomy are not so am- biguous, however, Even in the near-term, Okla homa’s gas producing and gus transportation sectors will benefit from the inevitable fuel aWitching from high sulfur coal and fuel oil ta natural gas.65 With the plentiful supplies of natural gas at favorable prices natural yas will caplare a larger market share when the stan- dards become effective. The Gas Research Institute advocates gas reburning, where natural gas js injected and ig- 73 nited downstream of the main combustion zone, When building new plants, natural gas will have an enhanced position because of the 8Op stan- dards, Although the increase in gas consumption is certain, the volumes may be relatively small. Gas must compete with all of the alternative ways to meet the standards which includes promising clean coal technology. For example, one estimate is that Phase I will add only 14 bef to national gas market demand, and Phase II will add 200 bef.57 PERMIT PROGRAM The Problem SIPs, Since 1970, the core of the Clean Air Act has been the State Implementation Plan (SIP). The typical SIP identifies the state's significant emissions sources and, through mathematical modeling, specifies what emission reductions are needed from each source, and the measures nec- essary to achieve them, in order to meet federal ambient air quality standards. SIP's have grown, in most cases, to be very detailed, complicated, and difficult to access. They have also been difficult 16 change, requiring both state and federal approval » often received only after lengthy delays. Thoughtful observers have long favored a permit program forair pollutants aa a means of addressing these problems. Permits. Proponents of permits point to a highly successful model, the National Pollutant Discharge Elimination System (NPDES) program under the Clean Water Act. In NPDES, the regu- latory requirements of the Clean Water Act are specified in a permit for cach source, The permits and source reports are available for inspection in BPA regional offices, Title V of the 1990 CAAA provides for a per- mit program that incorporates the best. features af NPDES and focuses on environmental results, Its major features are as follows:58 * Operating permits are required for all major air pollution sources, * Permits must be renewed every live years, * Permits specify all requirements of the Clean Air Act that apply to each source. The states are given the reaponsibility of de- veloping the permit program, although EPA re- fain the authority to establish a program if a stato foils to do so and W velo permits that do not comply with federal law. The 1990 CAAA require
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the states to levy a permit fee to support their pro- grams. The states must secure suthorization from their legislatures to establish these programs and to levy permit feos if state statutes do not already permit these actions, The Oklahoma Connection The Oklahoma statutes do not currently pro- vide the authority necessary for the Oklahoma State Health Department's Air Quality Service to establish, operate, and finance (through permit fees) a permit program. Loyistation will be intro- duced in 1992, however, seeking such authority, ‘The state has until November, 1993, to submit its permit program to EPA for approval, Although there is room for state-level choice, a state must design the program to conform with lengthy and detailed EPA guidelines. For example, the initial draft of these guidelines required 70 pages in the Federal Register of Friday, May 10, 1991. Oklahorna’s Air Quality Service is already at work on the design of the new permit program. In fact, this feature of the 1990 CAAA accounts for most of the claims on state resources attributable to its passage. State Policy Options It. seems appropriate to devote a large share of any new agency resources to the permit pro- gram. In a practical sense, permits will provide the mechanism for applying regulations to individual sourees, and they will establish the operatinug benchmarks against which regulatory authorities and source managers Will measure compliance, If they work well, permits will resolve uncer lainties regarding which regulations are appli- cable to each source and clarify the nature of each regulation. They will promote a clearer under- standing of requirements at the operating lavel- for both operators and vegulators, That will facili- tate monitoring and compliance. Tf they work poorly, permits could be a severe handicap to Oklahoma industry, To avoid this outcome, several program features are critical, First, the state authorities must approve permits promptly, both for existing sources and prospective new sources. Second, permits must allow for aggregation of the many emission points often present in a single facility or source. Third, the permits must allow sources to change their operations fo deal with the ehanges inherent in a Ja dynamic economy without seriously jeopardizing environmental quality, Fourth, the regulation authorities must clarify a “complete and timely" permit application removing doubt whether an applicant can continue to operate pending permit approval, Filth, the state must spell out clearly the relationships between the permit and the SIP, in as mueh as the SIP will continue to be a guide for regulatory authorities. Sixth, the state must pro- vide technical assistance to small businesses, many of which will be subject Lo permitting re- quirements of any kind for the first time. State regulatory authorities are fully aware of these requirements. Developing a permit program that provides them, however, is difficult, [t will undoubtedly require additional resources to do the job and communication with potentially affected parties and the public-at-large. CONCLUSIONS Late in 1990, afler nearly a decade of debate, Congress approved extensive amendments to the federal Clean Air Act, Although the legislation is federal, impacts (ror the amendments will be felt by businesses and citizens in every state, including Oldahoma, There is lite doubt that the nation's, and the state's, air will be cleaner as a result, How- ever, cleanor air is not costless. State motorists will pay more for cleaner vehicles and fuels. If ‘Tulsa or Oklahoma City go back on the “dirty air” list, they will be hit with significant compliance costs and probably lose some of their attractive. ness u& sites for new businesses, Emitters of air toxics could face significant increases in pollution prevention or abatement coals. Costs, in torts of lost. produetivity and growth, could mount over time. Electric power plants could experience cost increases from the implementation of the new acid rain provisions, and Oklahoma firms will have to underwrite the costs of a new permit program to be administered by state pollution contvol officials, Although some of these costs can be esti- mated, existing information is not good enough to support am accurate determination of all of the custs of the 1990 CAAA. This is due partly to the fact that many of the key administrative regula- tions necossary Lo implement the act have not yet been written, But the bigger difficulty is that of delormining how decision-makers will respond to
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the incentives and disincentives created by the act. This seems especially tre for both the air toxies and acid rain provisions. Not all of the impacts of the CAAA will be negative, however. Olclahoma refineries could benefit from increased demand for reformulated gasoline. Oklahoma gas producers could see greater demand for CNG, and the producers of pollution control equipment should prosper. Tn a market economy, costs of regulation will be minimized and benefits maximized, if private parties are free to choose among alternative pro- cesses, products, and technologies, Environmen- tal laws and regulations have often erected road- blocks to free choice. The acid rain provisions of the 1990 CAAA are a notable exception; if mar- kets in emissions permits are competitive, costs of complying with the new acid raid proyisions will be minimized, Still, governmental oversight and assistance will probably be needed to make this market function well. Beyond this, state governments have some responsibility to reduce the costs associated with, and enhance the opportunities provided by, the CAAA. What is needed most. are polivies that: * enhance the competitiveness of CNG, * promote voluntary efforts to reduce ozone and carbon monoxide, * facilitate the production and use of oxygen- ated fuels, * provide assistance to small businesses af- fected by the new air toxics regulations, * facilitate university-government, partner- ships in pollution reduction and control, * tackle the air toxics problems not covered by federal regulations, * provide better information on the nature of the air toxies threat to Oklahomans, and * produce an effective permil program, As we learn more about the regulations and impacts spawned by the CAAA, this list will un- doubtedly grow. NOTES IMason, Keith, 1991, "The Beonorle Impact," BPA Journal, 17(1), p. 46, Zo Mew of Technology Asseasment, 1989, Catching Our Bronth, Washington, U.S, Govt. Printing Office, p, 147, Mason, p. 46, 75 4Shearman, Jennifer, L991, "Fuel Oxygenates; De- mand Outpaces Supply," Chemical Engineoring, Octo- ber, p. 67. SShearman, ibid. 6DiBona, Charles J, 1990, “he Environment Domi- nates Induatry’s Attention,” Hydrocarbon Processing, Docomber, p. 50. TChang, Tai ¥, Hammerle, Robert 1,, Jaxpar, Steven M., and [rving T. Salmeen, 1991, “Alternative Transpor tation Fuels and AirQuality,” Environmental Scienceand Technology, 26(7), p. 1196, SAverill, Dayid, 1991, “Clean Fuels,” Tulsa World, December 8, p. D-l. Avorill, ibid. Wavorill, ibid, 11 American Gas Association, 1991,”"Projectad Natural Gas Demand from Vehicles Under the Mobile Source Provisions of the Clam Air Ack Amendments,’ Energy Anelysts, January 40, 2Oklahboma Air Quality Council, 1990, 1990 Okla honma Aty Quality Report, Oklahoma City; Okluhoma Statu Department of Health, Air Quality Service. Wikverly-Douze, Susun, 1991, "Dirty-Air Status Could Spell Trouble Por Tulwa,” Pulea World, July 16, pp. A-l, Ad. Everly-Doure, ibid, 15Office of Technology Assesamunt, Catehing Our Breath, p. 147. l6Ryerly-Douge, p. Act. Vorticn of Technology Assessment, Catching Our Breath, pp. 128, 143, '8Bartik, Timothy d., 1984, "The Effeeta of Bavivons mental Regulation on Business Location in (he United Statey," Growth and Change, Summer, pp, 224, is a good review of (hese studies, WMcConnell, Virginia D. and Robert M, Schwab, 1990, “The Impact of Environmental Regulation on In- dostry Location Decisions: The Mator Vehicle Induatry,” Lind Economics, 6601), pp, 67-81, 2Rowe, Robert D., Shelby, Michwol, G., Hipel, Jushua B,, and Ari Michelsen, 1989, “Using Oxygenated Fuels to Mitigate Carbon Monoxide Air Pollution: The Case of Denver," Contamparary Policy Ieenes, pp. 39-63. 21 Rowe, ot al, p. 49, Office of Nechnology Assessment, Catching Our Breath, p. 186, 280 fice of Technology Asaesnment, (bid, », 125, 4 kKrupnick, Aland. and Paul R. Povtney, 1991, “Con- trolling Urban Air Pollution: A BonefiteCost Assess: ment,” Sefenee, 262(April 26), p. 524, 26Rows, ot al, p. BO. 26Rowy, wt ul, p, bd:
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27 environmental Protection Agency, 1990, Taxies in the Community, Washington: U.S, Govt. Printing Office. 28Office of Y'echnology Aaseasment, 1989, Statement. before the Subcommittee on Superfund, Ocean and Water Protection, Committee on Environment and Public Works, U.S, Senate, May 10, 2Ohemical Enginvering, August, 1991,"Chementator,” p. 25, 40Sheiman, Deborah A,, 1991, The Rightta Know More, Washington: Natural Resourves Defonsy Council, 4tEnvironmental Protection Agency, December 14, 1990, Documentation for Developing the Source Cal- agory Lint (Preliminary Draft), Office of Air Quality Planning and Standards, Research Triangle Park, NC. S2Mason, p. 45. AChristainson, Grogory B., and Robert A. Havernan, 1941, “Publi¢ Regulations and the Slowdown in Produc: livity Growth,” American Beonomic Review, 71 (May), pp. 320-426, 84Gray, Wayne 1, 1987, “The Coat of Regulation: OSHA, EPA and the Productivity Slowdown," Amertean Economic Review, 77(December), pp. 994-1006. Gray, Wayne B., 1990, “The Impact af OSHA and EPA Regulations on Productivity Growth, Journal of Regulation and Social Costs, 1990, pp. 25-47, 86Garrison, John R. 1991, “Will the New Law Protect Public Health?", EPA Journal, 17(1), p. 58. 47Chvistuinsen and Hayeman, 1981. Gray, O87. S9Doland, Michael R,, 1991, Lettorto Rditor, Lssuen 1 Science and Technology, Fall, p. 17. ‘WEnviroomental Science and Technology, 1991, "ES and T Currents,” 26(7), p, 1188, 4'Council on Environmental Quality, 1991, Environ mental Quality: 21st Annual Report, Washington: U8. Govt, Printing Office, p. 121, 2CRQ, ibid, Environmental Science and Tevhnology, 191, "ES and T Currents,” 26(9), p. 1519, 4US. House of Representative, Clean Air Act Amendments af 1990, Conference Report to Aewompany §, 1630, Oct, 26, 1990, 45See for example, U.S. Environmental Protection Agency, Evovss Byniastons : Proposed Acid Rain Rule, 400/ 1-91/087, Gel, 1991; U.S. Envirenmental Protection 76 Agency, Allowince System: Proposed Acid Rain Rule, 400/1-91/034, Deo, 1991; U.S. Environmental Protection Agoney, Permits: Propomd Avid Rain Rule, 400/1-91/035, Oct, 1991. 46Soe, for oxample, Temple, Barker and Sloane, Clean Air Response: A Cinidebook to Strategies, a Report.to the Electric Power Research Institute, Palo Alto, Dec. 1990, ATBPA, Allowance System, op. ¢it.,p, L. MBALoumnce System, op. clt,, p.G. The EPA will maine tain an "Allowance Tracking System" to compile infor- mation on the fow and use of 809 allowances, After the January 30 deadline the EPA will account for the al- lowances required and available, and the BPA will bank any excess allowances for the new calendar year. 49See, for example, Dudek, Daniel J., “the Allowance Market, Theory, Primary Mechanisis and Regulatory Principles," in Lock, Reinier and Dennis P. Harkawik ed, The Clean Air Act: Compliance and Opportunity, Public Uilities Reports, Inc,, Arlington, Va., 1991, 50Rose, Kenneth and Robert Burris, Overview and Discussion of the Key Regulatory Issues in Implementing the Eleviric Utility Provisions of the Clean Air Act of 1990, Regulatory Research [natitute, June, 1994, p, 14. BIRPA, Permits, op, ott p. 5. S21CP Inc, Regulatory Impact Analysis of the Pro- posed Acid Rain Laplementation Regulations, Prepared for the Office of Atmospheric and Indoov Air Programs, Acid Rain Division, U.S. Environmental Protection Agency, Seplomber, 1991. 53 Rohi, Douglos L. ord Dallas Burtyaw, The Electric ity Jonrnal, Vol, 8: No, 10, Deo, 1990, pp. h0-51. 4} fanson, ., J. Melburn, G, Pajndala, T, Taxon, G. Lurie, R, Fisher and G, Boyd, “he 1990 Clean Air Ach and the Great Lakes Heanamy: Challenges and Opportu- nities,” Proveedinge, Internutional Association for En- ergy Economics, Nov. 18-20, 1991, p. 221. 3ee, Brown, Ashlay, “State Public Utility Reyula- Hon and Title LV," in Lock, Rainerand Dennis Harkawik, The New Clean Air Act, op. cit, p. 178, 467e smendment will also encourage conservation, the installation of Nue gas desulfurization equipment and tho retirernent and reduced use of older planta. S7Hilt, Richard H. and Marie L, Lihn, Public Uellities Fortnighily, Vol, 128, No. &: Oct. 15, 1991, p. 20 68Rekert, Alun W., 1991, “Operating Permits: The New Program," BPA Journal, VI), pp.da-al.
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Previous Studies 1991 State Government Provision of Business Finance in Oklahoma HB 1017: The Education Reform Act of 1990 Oklahoma's Corporate International Trade Opportunities in Eastern Europe Choice: The Next Educational Reform Changes in Oklahoma's Tax Base in the 1980s: Implication for Economic Development The Oklahoma Superconducting Super Collider Proposal Effort: Lessons Learned Medical Care for the Uninsured: Approaches to State Policy The Cotton Industry in Oklahoma: Current Status and Future Prospects 1980 Oklahoma Constitutional Revision 1988-1989 State Debt Management and Budgeting for Capital Needs in Oklahoma The European Economic Community in 1992: Some Influences on the USA and Oklahoma Economies Child Care: What Role for State Government? Measures of Diversification Agricultural Product Processing in Oklahoma Public Policies Affecting the Oklahoma Coal Mining Industry The First Session of the 42nd Oklahoma Legislature: Highlights and Economic Development Initiatives 1989 Target Industry Analysis Migration of New College Freshmen in Oklahoma Resources for Oklahoma Public Education: Needs and Sources State Policy Toward Indian Tribes and Economic Development in Oklahoma Impact of Tourism and Recreation on Oklahoma State Policy for the Development of the Warehousing and Distribution Industry in Oklahoma 1988 Tax Exempt Bond Financing — A New Era for Oklahoma Trust Authorities Impediments to Growth of Small Manufacturers in Oklahoma: Another Perspective Constitutional Reform and Economic Development in Oklahoma The Legislative Development Efforts and Economic Diversification College Student Migration and State Economic Growth Improving Oklahoma Higher Education: The Unfinished Agenda Banking — An Industry in Crisis The State Response Retailing, Public Policy, and Economic Growth Oklahoma’s 41st Legislature: A Review and Analysis of the First Session 1986 Impediments to Locating Manufacturing Activities in Oklahoma: An Update The Status of the Oil and Gas Sector Systematic Thinking for State Tax Reform Local Infrastructures in Oklahoma and Economic Development The Oklahoma Ethics Commission: Toward Greater Confidence in the Public Sector Higher Education and Economic Growth: The Quality Dimension Tort Reform and Insurance Rates Deregulation of the Trucking Industry: Current Issues 1985 Oklahoma State Government Reform in 1985 State Government Responses to Changing Natural Gas Markets Right-to-Work in Oklahoma Legislative Initiatives to Increase the Supply of Venture Capital in Oklahoma New Tax Initiatives for Economic Development Industria] Hazardous Waste Policy in Oklahoma Workers’ Compensation Legislation: An Introductory Evaluation Education and Economic Development in Oklahoma: Recent Initiatives
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1984 Economic Development Implications of Governmental Reform The Council on Science and Technology State Financing of Higher Education: How Well is Oklahoma Doing? Oklahoma’s Constitution and Economic Development Policies: Are they Compatible? Renewed Local Tax Effort and the Continuing Property Tax Controversy Agriculture and Oklahoma Economic Growth State Financing of Local Water Projects Revisited The Job Training Partnership Act in Oklahoma 1983 State Response to Declining Revenue Growth The Human Services Budget: Problems and Issues State Policies Affecting Local Government Oklahoma Enterprise Zone Act: An Empty Shell Natural Gas Market Ordering Initiatives The Creation of a New Industry: Parimutuel Betting State Control of Bank Structure in Oklahoma The Interest m High Technology and Economic Growth 1982 Workers’ Compensation Hazardous Waste Land Commission Rail Abandonment and the Oklahoma Program to Restore Service The Prospects for Nuclear Power inOklahoma: The Black Fox Decision State Government Financing of Water Resource Development in Oklahoma Oklahoma State Merit System The Impact of the New Federalism Unfunded Liabilities in State and Local Government Pension Programs Toward a Savings Account for Oklahoma State Government Property Tax Equalization