Category Archives: Economy

Adam Pagnucco, Economy

Taxpayer Flight from MoCo, Part Three

By Adam Pagnucco.

In Part Two, we detailed how MoCo has experienced an exodus of taxpayer income since 1993.  But MoCo is not alone: many large jurisdictions in the Washington region have suffered from taxpayer flight over the last decade.

Below is a chart showing the net change in tax returns for the ten largest jurisdictions in the region.  We show net change for two time periods: the last five years (2011-2016), which include the recovery from the Great Recession, and the last ten years (2006-2016), which include the pre-recession peak, the recession itself and the recovery afterwards.  MoCo ranks nine out of ten in both periods with only Fairfax faring worse.  Loudoun is the only jurisdiction showing significant in-migration in the last five years while D.C. was comparable to Loudoun over the last ten years.

Next, we show the net change in adjusted gross income (AGI), measured in 2016 dollars, over the two periods.  Once again, MoCo is the second-worst jurisdiction in the region with only Fairfax trailing.  Notably, only Loudoun had a net inflow in the last five years and Loudoun, Prince William and Frederick had net inflows in the last ten years.

Finally, we show the average AGI of in-migrants vs the average AGI of out-migrants over the two periods.  In every jurisdiction except Loudoun (during the 2006-2016 period), in-migrant AGI was lower than out-migrant AGI.  MoCo’s gap was the third largest.

This is a bad picture for MoCo and not a very good one for the region as a whole.  What is going on here?

First, as has been previously noted by George Mason Professor Stephen Fuller, the entire Washington region’s economy has slowed down since the Great Recession.  That is reflected in the deterioration of the numbers above between the last five years and the last ten years.  The “new normal” has not been kind to anyone in this area and that includes MoCo.

Second, Fairfax has been affected by taxpayer income losses even more than MoCo.  Like MoCo, Fairfax is a huge county with huge bills to pay and nightmarish traffic congestion.  But Fairfax also shares a long land border with Loudoun, which has grown dramatically in past decades and is currently the nation’s wealthiest county.  Of the $5.9 billion that Fairfax lost to taxpayer flight in the last decade, $2.5 billion went to Loudoun.

Third, in addition to the number of taxpayers leaving on net, MoCo’s problem is the big gap in income between those coming in and those leaving.  One would expect to see such a gap in places like D.C. and Arlington, the two jurisdictions with the biggest income gaps shown above.  That’s because both places attract lots of young people who work in and near downtown D.C. and then move out when they earn more and have kids.  That explanation does not work well for MoCo, which has a much lower percentage of young people in its population than D.C. or Arlington.  And yet MoCo’s gap, which is third in the region, has been significantly bigger than the gaps in Fairfax and Howard, two jurisdictions of similar wealth, in the last five years.

We have seen how MoCo compares to its large neighbors in tax migration overall.  But what about direct inflow and outflow relationships?  To whom does MoCo lose income?  And from whom does MoCo gain income?  We will begin examining that in Part Four.

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Adam Pagnucco, Economy

Taxpayer Flight from MoCo, Part Two

By Adam Pagnucco.

As we stated in Part One, the IRS tracks the inflow and outflow of returns, exemptions and adjusted gross income (AGI) for all states and counties.  Comparable data starts in 1993 and continues through 2016.  Here is what that data looks like for Montgomery County.

First, let’s look at the inflow and outflow of tax returns, which approximate the number of households.

For most years, the number of tax returns leaving has exceeded the number of tax returns entering.  The chief exceptions have occurred during economic downturns, especially in the aftermath of the Great Recession.  We are skeptical of the data for 2015: there is no apparent explanation for the enormous drop in both inflow and outflow in that one year.  We saw those drops in every local jurisdiction we examined and they did not seem to produce huge swings in net changes, as we will see.

Below is the net change of tax returns (inflow minus outflow).

The net migration of tax returns – inflow minus outflow – tends to shrink during recessions but it is almost always negative.  Since 1993, there was only one year when inflow exceeded outflow – 2009, when tax return migration was +658.  In 2016, outflow exceeded inflow by 4,748 returns – the worst year on record.  The migration of exemptions, in and out, has followed similar patterns.

Now let’s look at the migration of adjusted gross income (AGI).  The chart below shows the total AGI of taxpayers migrating into Montgomery County and out of Montgomery County, adjusted for inflation and measured in millions of 2016 dollars.

Outflow has exceeded inflow in every year.  Note, once again, the fluky data for 2015.  Below is the net change, adjusted for inflation, in millions of 2016 dollars.

Every year has seen a net loss of adjusted gross income.  The year which came closest to a wash was 2010, when $24 million was lost.  The worst losses on record were in 2004 ($608 million), 2013 ($697 million), 2014 ($601 million) and 2016 ($672 million).  Over the five-year period of 2011 through 2016, $2.75 billion of taxpayer income left Montgomery County on net.

The IRS data tells one more story.  Thousands of taxpayers enter MoCo and thousands leave MoCo every year.  But on average, those who enter have lower adjusted gross incomes than those who leave.  The chart below shows the average AGI of in-migrants and out-migrants in 2016 dollars.

Since 1993, out-migrants have had greater adjusted gross incomes than in-migrants by an average of 14%.  In the 2011 to 2016 period, the average AGI of in-migrants was $71,707 in 2016 dollars while the average AGI of out-migrants was $83,262 – a gap of 16%.

One can only imagine the impact on the county’s budget when hundreds of millions of dollars in taxpayer income leave every year.

Montgomery County is not the only jurisdiction in the region to see a net exodus of taxpayer income.  We will examine how MoCo compares to its large neighbors in Part Three.

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Adam Pagnucco, Economy

Taxpayer Flight from MoCo, Part One

By Adam Pagnucco.

We have been printing a ton of posts about the economy on Seventh State, including discussions of our employment and income growth, our rate of business formation, our increasing reliance on corporate welfare to attract and retain employers, the role of economic growth in creating the county’s $120 million budget shortfall and reactions from County Executive candidates and gubernatorial candidate Kevin Kamenetz. Let’s be clear: as we wrote eleven years ago, without economic growth, we will not be able to meet our needs without more tax hikes in the future.  And today, we begin presenting the following facts.

More taxpayers have been leaving Montgomery County than entering it for a long time.

The taxpayers who are coming in make less money than the ones who are leaving.

And while this has been going on for decades, it is now worse than it has ever been.

Our basis for these statements is a data series on tax migration maintained by the Internal Revenue Service (IRS).  As the IRS explains:

Migration data for the United States are based on year-to-year address changes reported on individual income tax returns filed with the IRS. They present migration patterns by State or by county for the entire United States and are available for inflows—the number of new residents who moved to a State or county and where they migrated from, and outflows—the number of residents leaving a State or county and where they went. The data are available for Filing Years 1991 through 2016 and include:

  • Number of returns filed, which approximates the number of households that migrated

  • Number of personal exemptions claimed, which approximates the number of individuals

  • Total adjusted gross income, starting with Filing Year 1995

  • Aggregate migration flows at the State level, by the size of adjusted gross income (AGI) and age of the primary taxpayer, starting with Filing Year 2011.

For every state and county in the U.S., the IRS tracks both inflow and outflow of returns, exemptions and adjusted gross income.  But that’s not all: the IRS reports the origin and destination jurisdictions of these flows.  So data users can see a situation in which County X has a net inflow overall but has a net inflow from County Y and a net outflow to County Z.  The directions of these flows, in an out, become apparent when the data is downloaded and crunched.

Over the next few days, we will publish the following statistics.

Montgomery County’s inflows and outflows of returns and adjusted gross income from 1993 (the first year in which comparable data is available) to 2016.

Inflow and outflow statistics for MoCo and its large neighbors – D.C., Frederick, Howard, Prince George’s, Alexandria, Arlington, Fairfax, Loudoun and Prince William – to provide perspective.

A listing of destination and origin jurisdictions of taxpayer migration between MoCo and its neighbors.  This will identify MoCo’s comparative advantages and disadvantages in taxpayer flow across the region.

Tomorrow, we will proceed.

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Adam Pagnucco, budget, Economy

The View From 2007

By Adam Pagnucco.

A long time ago in a galaxy far, far away, a newish county blogger and professor named David Lublin reached out to a then-young civic activist who had just gotten involved in local politics to write about the county’s economy and budget.  The activist, who had only lived in the county for three and a half years and was already raising Cain about a new Metro entrance in Forest Glen, was still figuring out what was going on but – what the hell – he agreed.  This was the genesis of my second blog post ever, written in April 2007.  (The first was a piece on the Apple Ballot the year before.)

The county’s economic pressures, which have drawn substantial attention on Seventh State, were apparent more than a decade ago.  Then as now, the county was dealing with short-term budget issues.  But over the long term, I wrote that the end of the real estate boom – which would lead to the Great Recession – would result in three choices to balance the budget and preserve county services: large tax hikes, slowing the rate of budget growth or encouraging economic growth to fund the budget.  Many things happened over the ensuing decade: dramatic budget cuts, equally dramatic tax hikes, warfare with the school system and the state over education funding, breaking of union collective bargaining agreements and more.  But in the end, more a result of just muddling through rather than any strategy, the county picked options 1 and 2 – tax hikes and slower budget growth – and not option 3, which was encouragement of economic growth.  Indeed, because our economy has been so stagnant since the recession, we are now discussing pretty much the same things I wrote about eleven years ago.

Will the next decade be different from the last decade?  Folks, that is what this election is about.  It’s all up to you.

Here is the piece from 2007 reprinted.

*****

In Montgomery County local races, four issues regularly rise to the top: education, development, traffic congestion and the environment, in no particular order. In last year’s elections, all four issues were discussed by the candidates – especially development. But this spring a fifth issue has risen to surpass all of them: the county’s difficult choices on the budget. The budget is not only an unavoidable issue because it is central to the functioning of the government – it also affects the ability of county leaders to deal with each of the above four issues that are important to voters.

The county has a short-term problem and a long-term problem with its budget.

The short-term problem appeared in the first budget submitted by our new County Executive. While Ike Leggett’s proposal for $4.1 billion in county spending was 6.3% higher than last year’s budget, the increase was below the prior year’s rate of 9%. Leggett pronounced recent budget growth “unsustainable” and declared that no county agency, including the schools, would get its entire budget request. Despite an aggressive lobbying campaign by public sector unions – especially the Montgomery County Education Association – the County Council seems likely to uphold the broad outlines of the County Executive’s proposal.

Furthermore, Council President Marilyn Praisner has identified a $269 million budget deficit for the fiscal year starting in July 2008. The deficit margin is about 7% – which is close to the increase recommended for this year. The council may very well combine a small tax increase with careful maintenance of core spending to deal with this deficit. This may be enough to avoid modifying the county’s labor contracts with its employees as the Council President has recently discussed.

As serious as the short-term problem is, it does not compare to the county’s budget issues of 1991-92 when it suffered from an economic recession. At that time, 7,000 county employees were furloughed for four days. Public employees occupied the council chambers, teachers engaged in a work slowdown and some public school students walked out of classes to protest potential cuts. No one is predicting similar upheaval this time.

However, the long-term budget problem represents a significant challenge. Since 1990, the county’s population growth has averaged 1.4% per year while its budget has generally grown 5-10% per year. In recent years, the county has managed this by depending on big increases in property tax receipts driven by its real estate boom. That real estate boom has ended and property tax receipts will soon reflect that. The county faces three choices in the long run:

1. Large tax hikes to fund budget increases. The danger here is that those tax hikes may slow the county’s economic growth rate even further, worsening its fiscal problems in the future.

2. Slowing the rate of county budget growth to equal the rate of economic growth. This would mean county budget growth of 1-2% per year. This would be insufficient to meet the standards of service to which residents have become accustomed. School, fire, police and health care costs are all increasing at faster rates even if the size of the relevant county departments remains unchanged. This budget growth rate would also be insufficient to adequately compensate county employees, and that would gradually damage one of the nation’s best-educated, least-turnover-prone local government workforces.

3. Systematically encouraging enough economic growth to fund the county’s budget.

The third option reveals a naked truth that was not commonly discussed during the last campaign: budget policy and development policy are inter-related. Over the long run, limiting economic growth will limit the ability of local government to serve its residents. But as any resident of Phoenix or Las Vegas would observe, economic growth has consequences for quality of life. The question of the last campaign was, “Should we have development or not?” But the real question is, “How can we have enough economic growth to pay for government services we need without driving existing residents crazy?”

Economic growth comes from two sources: population growth and job creation. If one of these occurs without the other, or if they occur in different geographic locations, the result is traffic congestion. The two should occur together, at similar rates, and in nearby locations. This has direct implications for county development policy.

In general, the county has three kinds of developable areas: the agricultural reserve, the four downtowns (Bethesda, Rockville, Silver Spring and Wheaton), and the rest of the county. Most residents agree that the agricultural reserve should continue to be protected for cultural and environmental reasons. That leaves the other two areas for consideration.

The four downtowns are unique assets in the county because they each have residential density, concentrated office space and pedestrian-oriented retail space all within walking distance of each other. A resident of Bethesda’s central business district (CBD) who also works in the CBD does not have to use his or her car every day. That individual can walk to work and walk to the grocery store on the way home. The fact that all of the amenities of life are concentrated in a walkable radius cuts back on car use, which cuts down on energy usage, greenhouse gases and pollution. It also reduces the need for road maintenance.

But many residents may want to live in one CBD and work in another. This means that the CBDs should be connected, preferably through transit. Bethesda is connected to Rockville, and Silver Spring is connected to Wheaton through Metro’s Red Line. Bethesda could be connected to Silver Spring through the Purple Line. And a bus rapid transit route from Wheaton to Rockville is the county’s top transit study request of the state government. If both of those projects go through, the county will have four inter-connected downtowns.

How could the county encourage economic growth in downtowns rather than sprawl in non-transit-accessible suburbs? In the downtowns, the county could use zoning text amendments (or more ambitiously, coordinated and complementary updates to master plans) to encourage transit-oriented CBD growth. In non-CBD areas, project area transportation reviews and robust school capacity tests would limit development outside the downtowns. This combination of measures would channel economic growth to the CBDs while minimizing the consequences of traffic congestion and pollution. The side effect would be to encourage the creation of downtown entertainment districts, each customized to reflect the unique cultural identities of each CBD.

For those who are uneasy about growth in downtowns, keep in mind the other two budget options: large tax hikes or gradually deteriorating government services. No local area in this country – even Montgomery County – is immune to the negative long-run effects of either (or both).

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2018 Governor's Race, Economy

The Future of Montgomery County’s Economy

Today, I am pleased to present a guest blog by Kevin Kamenetz.

Montgomery County’s role as an economic engine for Maryland is in danger. The recent Sage Consulting report indicates that the county’s private sector employment has declined, job growth has all but stopped, and a precipitous decline in the number of new businesses created in the county suggests that the worst may yet to come.

Despite these challenges, it is critical to acknowledge, as others have, that Montgomery County remains a strongly managed jurisdiction that has been able to maintain a triple-A bond rating from all three major rating agencies. And according to state and federal averages, the unemployment rate in Montgomery remains lower than both the state and federal data. These figures are important indicators of general economic health, but the warning signs presented by this new report cannot be ignored.

We must work together to build upon the county’s strong foundation, and reframe Maryland’s role in economic development, if we are serious about reversing such troubling trends.

Montgomery County has already accomplished so much with Transit Oriented Development (TOD) and communities with multi-model transportation options for its residents. As the Baltimore County Executive, I have long-admired Montgomery County’s progress here, and have attempted to emulate much of that success, attracting more than $5 billion in private investment and developing the Baltimore region’s first TODs. We also created Greenleigh, a Traditional Neighborhood Design project patterned after Kentlands. And my successful effort to lure $1 billion in private investment in downtown Towson caused one outlet to suggest I have “Bethesda envy.” In many ways I do.

What I have recognized, and what Montgomery County already knows, is the value of promoting projects like these will get residents out of their cars and into town centers for ease and convenience. This is how we will rebuild our older shopping centers and strip malls into the vibrant places where people want to work and live.

Much like Montgomery County, Baltimore County has also been able achieve the coveted “triple AAA” bond rating. In fact, we are two of only 46 counties across the country to do so.

Moreover, we have also dealt with many of the same issues that Montgomery County now faces. When confronted with an aging population, stagnant job growth, and the threat of private sector migration, we took a unique approach. We doubled-down on our own assets to attract new jobs, while focusing on employer needs to build a job-ready workforce.

Following the end of a century of steelmaking, I led the largest industrial redevelopment on the East Coast at Tradepoint Atlantic, which is now attracting “millennial-bait” companies such as Under Armour, Fed Ex and Amazon, as well as other port-related activity. Today, there are more people working at Sparrows Point than when the former Bethlehem Steel mill closed in 2012. These businesses are projected to add 17,000 new jobs when the global logistics hub is fully developed in the next five years.

Meanwhile, we opened a two-way dialogue with our existing employers and launched Job Connector, an innovative $2.5 million program that partners with companies, labor trades, schools and colleges to build a job-ready workforce. This employer-driven supply-and-demand strategy not only helps us keep our unemployment rate low, but it gives us a competitive advantage to retain key employers — and jobs they create — here in the state.

Together these approaches to economic development are transforming job prospects and economic opportunity for the entire region.

This progress has been bolstered by efforts to strengthen the foundation of any economy: a thriving educational system. Through Baltimore County’s unprecedented $1.3 billion program to build or rebuild 90 schools, as well as introduction of a Community College Promise program that will offer a debt-free education to qualified students, we are making the long-term investments to prepare a new generation for a 21st century workforce.

The kicker? We have accomplished all of this without ever once raising the property tax or income tax rates during my 8 years and Executive and 16 years as Councilman. In short, we’ve shown that we can be economically bold, while also being fiscally prudent.

Every one of Maryland’s 24 jurisdictions — including Montgomery and Baltimore Counties, and especially the independent jurisdiction of Baltimore City, face new and evolving challenges. Montgomery County cannot and should not be expected to face these challenges alone.  That is why Valerie Ervin and I want to work together as your next Governor and Lt. Governor to build upon these successes for the entire state of Maryland.

Together we can ensure that Montgomery County remains one of our state’s key economic drivers for generations to come.

Kevin Kamenetz is the Baltimore County Executive and a Democratic candidate for governor.

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Economy, Montgomery County

Riemer Exacerbates Economic Growth Concerns

Andrew Metcalf over at Bethesda Beat reported on Council Chair Hans Riemer’s response to a question on the successes of the two-year old county economic development nonprofit:

“OK, so what are the successes of the Economic Development Corp.?” Riemer said. “Um, I might need a little staff here. My economic development team is not here.”

After a brief pause, he continued, “They are a new organization, they are growing. They have helped us build consensus around economic development. They have helped engage the business community in a positive way. I think they have improved the dialogue.”

Riemer’s inability to come up with an answer only continues the building narrative that the county government is not doing enough to promote economic growth or address fiscal concerns. His flub also undercut his claim that the Sage report cherry-picked its data and the claims are politically motivated:

“In comes this attempt to overturn the apple cart and get everyone shooting at us again,” Riemer said.

Consider the cart not just overturned but run over by a truck.

Is Riemer in Danger? Probably Not

Despite hiccups likes these that can accompany that spotlight on the Council Chair and a wealth of candidates,  Riemer looks to be on a solid path to a third term. He’s the only at-large member seeking reelection. After two terms, he has high recognition, which should be enormously helpful in a large county with so many candidates trying to get the electorate’s attention.

It also helps that most people, supporters or not, would agree that Hans is a nice guy. He has a deserved reputation for being willing to listen to a variety of viewpoints and responding respectfully. Naturally, decisions he has made leave some unhappy, but at least they feel heard.

In short, while his time as council chair has had its rough spots, it’s hard to see how Hans loses. No one is really pointing at Hans in way that could focus any anti-incumbency mood. There is little incentive to attack rivals in a multi-candidate race. Many Democrats are also far more angry at Republicans.

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Adam Pagnucco, Bill Frick, County Executive, Economy, George Leventhal, Marc Elrich, Roger Berliner

Executive Candidates React to Sage Consulting Report on MoCo Economy

By Adam Pagnucco.

Last Friday, the candidates for County Executive attended a forum to discuss a report by Sage Consulting listing numerous problems with the county’s economy.  Afterwards, most of the Executive candidates commented on the report and on the economy more generally via email and social media.  Their responses say a lot about which ones take the economy seriously, an issue that has drawn much attention from Seventh State.

Council Member Roger Berliner (whom your author supports) sent out this email over the weekend.

Our county has serious work to do to improve our business climate, diversify our economy, and increase the number of good jobs. It must be Priority #1 if we are going to be able to meet the needs of our school system, reduce congestion, invest in public safety, and protect our environment.

I have a record that I am proud of on improving our economy and a vision for our future that you can read about here. Some of my competitors have records too. Others have just words. It’s important to consider what we have done in pursuit of increasing prosperity, not just what we say we will do.

My record includes leading the successful effort to reduce our energy tax three years in a row; creating the small business navigator and a micro-loan program to help our local small businesses and entrepreneurs thrive; and playing a leading role in our Amazon bid. My vision is of a forward leaning county that embraces innovation, education geared towards the jobs of tomorrow, and vibrant urban centers served by state-of-the-art transit.

Yesterday, a consultant tasked with assessing our business climate and outlook, issued a scathing report. It highlighted one startling statistic: that “between 2011 and 2016, the number of [business] establishments in Montgomery County increased by 6, or roughly the population of businesses at a strip mall.” The report concludes that “Montgomery County therefore desperately needs to step up efforts to expand its commercial tax base.” You will get no debate from me on that point.

At the same time, the report declares:

This should not be mistaken for an assertion that Montgomery County is anything other than the finest possible location for Amazon HQ2. It will be difficult for Amazon to identify an area that is as open to new ideas, offers such abundant human capital, is as saturated with transportation options, supports such high quality public education, is as institutionally rich, and is as committed to shared prosperity as Montgomery County, MD.

So, while it is true that we have our challenges, challenges that must be met head-on, it is also true that we have extraordinary assets and a quality of life to match. I will build on our assets as your next County Executive, work diligently to improve our business climate, and am 100% committed to expanding a “shared prosperity.”

Life is good in Montgomery County, but we can make it better still. That’s my goal: a “more perfect” Montgomery County.

In service,

Roger Berliner

Delegate Bill Frick (D-16) sent out this email hours after the Executive forum ended.

Something doesn’t add up. How does a county with our talent, our people, our great public schools and our values lag behind the rest of our region in job growth and economic development? How is it that private sector employment has declined by 12,500 jobs from 2006 to 2016? How is it that, during that same time period, Montgomery County created on net just six new businesses?

The answer is clear. As I told the Montgomery County Business Roundtable earlier today, it is our political culture. My opponents have built a political culture in Montgomery County that doesn’t want to work with businesses to thrive and grow here in our County.  And if we elect someone to be County Executive who is part of that culture, things will not get better for business.

I am an outsider to Montgomery County Government and yet I have real governmental leadership experience as the Majority Leader of Maryland’s General Assembly. I have the relationships in Annapolis that can help our County. But since I am not a multi-millionaire, and unlike three of my opponents, I am not spending your taxpayer dollars to fund my campaign, I need your help to communicate with Montgomery County residents who deserve leadership that the current members of the County Council will not provide.

Montgomery County is an awesome place to live. It’s why I’m raising my two children here and sending them to our public schools. But we have a problem, and that is that we must reform in order to create new private sector jobs and increase our tax base. We have to focus on the core functions of county government – education, public safety, and transportation – and those need to be our priorities for our budget. Our County Government does not need to be in the liquor business, a failed venture that is hurting our food culture to the benefit of downtown DC restaurants. We have to have a culture of ‘yes’ in county government so that we are trying to find reasons to say yes to businesses rather than find reasons to say no.

Sincerely,

Bill

Former Rockville Mayor Rose Krasnow ran this Facebook ad.

David Blair commented on Twitter.

Council Member George Leventhal commented on Facebook.

We are not aware of Council Member Marc Elrich commenting via email, Facebook or Twitter.

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Adam Pagnucco, Economy

MoCo Establishment Growth is Almost Last in the Region

By Adam Pagnucco.

Recently, we published an astonishing statistic: the State Department of Assessments and Taxation processed just nineteen new business filings in Montgomery County in FY16.  In the year before, there were 57 new business filings in the county.  We were skeptical of this statistic because it only applied to two years, thereby making it subject to flukiness.  It is also conceptually incomplete.  For example, a business headquartered in another Maryland county and opening a new location in MoCo would not be captured in new filings for the county.  So we checked data from the U.S. Bureau of Labor Statistics (BLS) and confirmed a grim fact: MoCo’s growth in establishments is almost dead last in the Washington region.

BLS tracks net growth in establishments for states and counties.  BLS uses this definition for an establishment:

The physical location of a certain economic activity—for example, a factory, mine, store, or office. A single establishment generally produces a single good or provides a single service. An enterprise (a private firm, government, or nonprofit organization) can consist of a single establishment or multiple establishments. All establishments in an enterprise may be classified in one industry (e.g., a chain), or they may be classified in different industries (e.g., a conglomerate).

BLS has establishment data for states and counties going back to 2001 on its website.  The screenshot below shows establishment data for MoCo from 2001 through 2016, the last complete year for which BLS has data.  It shows a pattern of slow establishment growth that stopped in 2007 and has basically flat-lined since.

In comparison with the 24 jurisdictions that comprise the Washington metro area, MoCo ranks second-to-last in rate of establishment growth from 2001 through 2016.  Only tiny Falls Church City was worse.  The county’s rate of growth over the period (10%) was about one-third the region’s rate (32%) and Fairfax County’s rate (30%).

There is one other difference between MoCo and most of its competitors in the region.  Starting around 2011, the region began to recover from the Great Recession and most jurisdictions started growing their establishment count again.  Between 2011 and 2016, the region’s 24 local jurisdictions collectively recorded a net gain of 13,939 establishments.  D.C. and Fairfax County added more than 3,000 each.  MoCo had a net gain of 6.  Not 600 or 60.  SIX.

2011 was the first full calendar year that the county’s FY11 doubling of the energy tax was in effect.  Is that a factor in what has happened since then?

The establishment data aligns with other data we have published on employment and income, the recent budget shortfall, the county’s increasing reliance on corporate welfare to attract and retain employers, the lack of new business filings and the impact of the liquor monopoly on the restaurant industry.  The county has great assets, including its educated workforce, its superior schools and college, a large federal presence, low crime, high wealth in some of its zip codes and almost no public corruption.  But we are underachieving economically and that is going to come back to haunt us sooner rather than later.  Revitalizing the economy must be a key issue in the upcoming election.

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Adam Pagnucco, Economy

MoCo After Discovery

By Adam Pagnucco.

Word of Discovery Communications’ exit from Silver Spring has exploded like a bomb in local politics, prompting attacks by the state Democrats on Governor Larry Hogan and two outsider County Executive candidates on the county government.  But the answer to the real question is not to be found in political soundbites: where does MoCo go from here?

Let’s start by acknowledging the unusual nature of Discovery.  The only reason the company was in MoCo to begin with is that its founder, John Hendricks, moved here in his 20s and started it at age 30.  If Hendricks had instead lived in, say, Philadelphia, the company would have been started there.  Discovery was largely a stand-alone organization that was not surrounded by peers.  When Hendricks retired as Chairman three years ago, it was probably inevitable that the company was going to move with media-packed New York City as a prime option.  Accordingly, no one your author knows who has been associated with Discovery is surprised at its exit.  While the company was important to Silver Spring, the departure of a firm like United Therapeutics, a key player in the local bio-tech industry, would have been more troublesome because of the county’s long-time efforts to build up that sector.

That said, Discovery will leave a big hole in Downtown Silver Spring.  Its 1,300 employees are hugely important to Silver Spring’s lunch scene and happy hour crowds.  (Anyone who sees the sheer number of people walking through the Georgia Avenue crosswalk near the building to access Ellsworth Place can appreciate this.)  The building itself was constructed to house one tenant.  Subdividing it for multiple tenants could be costly and challenging, thereby complicating its reuse.  Discovery is looking to sell it but it may not be occupied for a while.  Finally, the viability of Silver Spring as an employment center may be questioned by developers and tenants alike.  Will the central business district continue to be a jobs base or will new development be overwhelmingly residential, thereby cementing Silver Spring as a bedroom community for D.C.?  And could that worry be applied to most of the rest of the county?  It’s telling that the two most prominent new office buildings in the pipeline, the Park and Planning headquarters in Wheaton and the new Marriott headquarters in Downtown Bethesda, are supported by public money.

Aside from the usual political elbow-throwing, the reaction of the county has focused on the financial incentive it offered to Discovery to stay.  County Executive Ike Leggett said in a statement, “The County and State made a substantial proposal designed to accommodate Discovery’s challenges. Together, we were ready to provide considerable incentives to retain their presence in the County.”  Bethesda Magazine quoted Leggett as saying, “The incentive package was one of the largest offered to a company during his time in office, although he did not reveal specific details about the package Tuesday.”  We hear it was in the same ballpark as the $22 million offered by the county to retain Marriott with more money coming from the state.  Notably, New York State offered no incentives to attract Discovery.

The county’s reliance on corporate welfare for economic development is one of the great untold local stories of the last few years.  Business incentives, usually contained in grants convertible to loans when job targets go unmet, are disbursed through the county’s Economic Development Fund (EDF).  They are approved in secret under an exemption from the state’s Open Meetings Act.  Residents do not learn of the amounts spent or the recipients’ identities until after the agreements are signed.  Summary details are available only in annual EDF reports released during the County Council’s budget process.  Aggregations of those reports show that the county has approved 49 incentives totaling $88.3 million between 2012 and February 2017, of which 35 incentives worth $79.7 million were used for retention.  That’s right, folks – over the last five years, the county agreed to pay almost $80 million to existing employers to stay.  Six of those incentives consist of annual disbursements payable over periods ranging from six to fifteen years, thereby continually weighing on the tax base.  For the sake of comparison, the county is spending $80 million for libraries and recreation combined this fiscal year.  Just this month, the County Executive has proposed a mid-year savings plan of $60 million, including a $25 million cut for MCPS, while corporate welfare remains untouched.

Since 2012, MoCo’s corporate welfare has skyrocketed.

Is this really working?

MoCo should be an economic development leader.  We have tremendous advantages, including a large federal presence, a highly educated workforce, good schools, lots of investment in transportation projects (including the Purple Line), substantial wealth in some of our neighborhoods, low crime and virtually no public corruption.  Few localities in the nation can say they have all of these things.  But instead of being a growth leader in the Washington area, the county’s total employment growth of 3% between 2001 and 2016 ranked 20th of 24 Washington-area jurisdictions measured by the U.S. Bureau of Labor Statistics.  MoCo’s jobs base and its real per capita personal income have not recovered from the Great Recession.  And now our economic problems have contributed to a $120 million budget shortfall.  We’re not leaders, we’re laggards.  We must do better.

Discovery is headed out the door, but if we want to create the next generation of Discoveries, we are going to need a more creative and disciplined economic development strategy than relying on bribes to retain big employers.  We are going to have to save tax hikes for desperate times and not pass them simply because we’d like to spend money.  We are going to have to invest more in transportation and education and pay for it by restraining growth in the rest of the budget.  We are going to have to do things like ending the liquor monopoly, directing more of our county reserves into community banks where they can finance local job creation, cutting impact taxes near Metro stations to encourage transit-oriented development and raising them elsewhere to pay for it, and getting rid of redundant bureaucracy.  (Fun fact: we are the only local jurisdiction that requires two different independent agencies to sign off on every record plat, which drives developers banana-cakes.)  And after passing numerous employment laws, we should give employers time to adapt to them rather than immediately introduce more mandates.  If we implement this kind of agenda, maybe we could attract and retain businesses without handing out tens of millions of dollars in corporate welfare.

Economic development is tough.  It’s about more than one big employer.  It takes time.  It takes multiple components.  Most of all, it takes discipline.  If our next generation of elected leaders learns these lessons from Discovery’s departure, we will come back stronger than ever.  If not, Discovery won’t be the last high-profile employer to say adiós.

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Adam Pagnucco, budget, Economy, income, taxes

Is MoCo’s Budget in Trouble?

By Adam Pagnucco.

Montgomery County’s $120 million budget shortfall has set off political fireworks this election season, including attacks from Delegate Bill Frick (D-16), who is running for Executive, and Republicans who question how taxes could be going up while revenues are going down.  County Council incumbents pooh-pooh it, insisting that the budget decline is unremarkable and the economy is strong.  County Executive spokesman Patrick Lacefield, who once predicted that any loss of the county’s $30 million in liquor profits would cause a big property tax hike, now says that the $120 million shortfall is “pretty small” at just 2.2 percent of the county’s budget.

What is going on here?  Is MoCo’s budget in trouble?

First, the incumbents are right to point out that mid-year corrections, including budget savings plans, are not uncommon.  Between FY08 and FY11, the County Council approved five mid-year cut packages ranging from $30 million to $70 million each due to the Great Recession.  In FY16, the council approved a $54 million savings plan associated with the U.S. Supreme Court’s Wynne decision and disappointing income tax receipts in the prior year.  While mid-year cuts happen occasionally, it’s important to note that their history indicates that they are often – but not always – produced by looming economic problems.

So what’s causing this one?  No one is totally sure yet, but there seems to be two phenomena at work.

Declining Income Tax Payments from the Wealthy

In Maryland, the state collects income taxes on behalf of local governments and remits them in periodic distributions.  Part of MoCo’s problem originated in its November income tax distribution from the state, which includes extension filers who tend to be disproportionately very wealthy.  It’s difficult to forecast income tax payments from wealthy people because their dependence on capital gains and business income can be volatile.  The chart below from the state’s Bureau of Revenue Estimates contrasts the annual change in average federal adjusted gross income between all MoCo taxpayers (pink bars) and the top 100 MoCo taxpayers (blue line).  Income change for all taxpayers usually varies by single digits each year while income for the super-wealthy almost always varies by double digits.  This creates serious forecasting challenges for the county government since the super-wealthy have a material impact on its budget.

One relevant fact is that the November distribution may be down by 29% in MoCo but, according to the state, it is also down by 30% in Howard County and 26% in Baltimore County.  One thing these three jurisdictions have in common is that they all have substantial concentrations of very wealthy people.  That suggests that some of MoCo’s problem is not specific to the county but rather to variations in the incomes of the super rich.

Why is this happening?  One explanation lies in capital gains income.  Council analyst Jacob Sesker writes:

To a large degree, that volatility is the result of the year-to-year variations in the capital gains income of a small number of County residents. Illustrating this point, part of the projected FY18 decline in income tax revenue can be traced to a sharp drop in the capital gains of the County’s top 50 taxpayers, who realized gains in tax year 2016 that were 50% of the gains realized in tax year 2015, resulting in $21 million less in County income tax revenue (Revenue Administration Division of the Maryland Comptroller). Staff’s review of tax return data published by the Comptroller indicates that roughly 1.8% of Montgomery County returns report income of $500,000 or greater. On average, these returns explain more than half of any year-to-year increases in income tax revenue, and explain more than 100% of any year-to-year declines in income tax revenue.

Another factor could be the tax bills being considered by Congress, which contain numerous large cuts for wealthy individuals and corporations.  The super wealthy could be deferring capital gains and business pass-through income to next year when they would be subject to significantly lower rates.  If true, that would mean less income tax revenue this year but perhaps more next year when the deferred income is reported.  That’s just a theory but it can’t be ruled out.

Broader Economic Weakness

There are other facts that can’t be explained by the tax planning of the super wealthy.  First, FY17 (the year of the 9% property tax hike) closed out with $25 million less than expected.  Second, the county is writing down $206 million over the next six years in property taxes, energy taxes, transfer taxes, recordation taxes, telephone taxes and hotel taxes in addition to a $212 million income tax writedown.  The energy tax revision alone is $100 million over six years.  The reason for that is unclear, but it’s worth remembering that since commercial energy users pay roughly double the tax rates of residential users, some assumptions regarding employer energy use may be operative here.  It seems unlikely that a “strong economy” would produce such broad, multi-tax writedowns of the kind just put forth by the county.

What’s the bottom line?  Over the years, we have learned that under most circumstances, economic trends usually matter more than singular events.  One good year should not cause irrational exuberance and one bad tax distribution should not cause panic.  Whether the recent shortfall turns out to be meaningful or not, MoCo’s serious budgetary challenges are long term in nature.  They relate to decade-plus trends of lagging growth in employment and income, repeated funding of ongoing spending with one-time revenue sources and the county’s recent passage of large tax hikes and expensive employment laws at the same time, a unique combination among Washington-area jurisdictions.  That is on top of any targeting of Maryland and general economic insanity by Congress.  The big question is not about one tax distribution from the state but whether a combination of all these long-term factors will catch up with MoCo in a really bad way in the next couple years.

That’s a question for the next Executive and County Council.

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