In December, the News Tribune published an article about tax incentives often provided by local governments to encourage Costco to locate in their communities. The article specifically detailed incentives provided by the city of Duluth and St. Louis county to build public infrastructure for a Costco project here. Approximately $1.35 million from the city and $625,000 from the county in property tax abatement incentives were approved. The Costco site-selection team, city councilors, and staff from city planning and administration described the public benefits supporting the granting of the incentives. The News Tribune Editorial Board also concluded that the project would be an overall “good deal.”
The article and earlier discussions at Planning Commission and City Council meetings implied that Costco, the city, and the county carried out robust project analyses to support these conclusions. In other words, they had “done the math” required to justify the incentives.
Such claims, however, do not stand up well under closer scrutiny.
Costco indicated it needed the tax incentive to fill a financial “gap” for the project. But when a big-box retailer enters negotiation with a local government, it typically has already decided to locate in the community. Negotiations often are an attempt to extract as much as possible under the guise of “needing it.”
For the Duluth project, the development agreement indicates the city, county, and Costco established a need for incentives. I don’t agree.
Regardless of whether incentives are really needed for Costco to realize an industry-standard return, incentives granted result in an increase in the property tax base.
In Duluth, this increase in valuation will not be realized for 20 years for the city and 10 years for the county. During this time, the infrastructure improvements built will be the responsibility of the city and county and must be maintained, upgraded if necessary, and eventually replaced. There will also be additional costs for public services based on the size of the site and the expected increase in people and vehicles in the area. After property tax revenues are eventually received, will it be sufficient to make up for the accumulated deficit in revenue needed to sustain these obligations? No one knows. That level of analysis was apparently never done.
The project is to generate increased gross sales taxes for the city and county. But since population growth, median household income, and overall employment in the region is increasing very slowly, there is likely to be little increased demand for the products and services year over year. While Costco does provide a unique mix of products and services that may result in an increase in retail and wholesale spending from Canadians and others who may now shop at Sam’s Club in Hermantown, in my view, most spending will come at the expense of other retail outlets in the Duluth area. The net increase in sales taxes is the key number needed to determine the real fiscal impact of the project. There is no evidence I know of that this calculation was made.
The Costco project will create new jobs. But will it increase net employment in the area? Before the pandemic, the unemployment rate in the Duluth-Superior Metropolitan Statistical Area was 3.9%, which is full employment. Employers cannot find enough employees, even at higher wage rates. Therefore, most of the Costco jobs are likely to be filled by employees simply moving from other employers to Costco. The net full-time increase in employment, and therefore increased local income and spending power, is unknown
No one is opposed to a Costco store in Duluth. What is disconcerting is an apparent approach by the city and the county to economic development that relies on company statements, anecdotes, and ill-informed assumptions about potential project benefits — all while taxpayers are being asked to help bankroll the cost. A more rigorous data-driven process of analysis and evaluation clearly was needed, ensuring taxpayers the project’s public incentives are sustainable and will add real wealth and resilience to the entire community.
Mark A. Baker of Duluth has worked at a regional planning agency, for an affordable housing development organization, and as a city administrator and planning consultant. He has a bachelor's degree in political science and urban studies from the University of Minnesota Duluth and a graduate degree in community planning and public administration from North Dakota State University.