Jump-Starting Rural Economies   

By Doug Farquhar  | Vol . 26, No. 15 / April 2018
 

LegisBrief logoDid you know?

  • While employment rates in urban areas grew at almost 2 percent per year since the Great Recession, in rural areas that rate was less than 1 percent.
  • Between 2010 and 2016, close to 200,000 people left rural counties nationwide, while counties abutting metro areas saw a population increase in 2017.
  • Infrastructure neglect—such as investments in broadband, roads and schools—is more acute in rural areas than urban or suburban areas.

Although much of America is thriving economically, rural areas have not recovered from the Great Recession, and policymakers are concerned. Home to 46 million Americans and covering 72 percent of the land, rural America’s economy faces a competitive disadvantage compared to urban areas. Economic progress is hindered by, among other factors, a declining and aging population, lack of access to capital and stagnate infrastructure development.

Between 2010 and 2016, the U.S. Census Bureau recorded a population loss in rural areas due to out-migration, fewer births and an aging population. This is the bureau’s first-ever recorded decrease in population.

Much of this population decrease is reflected in lack of economic opportunities. Rural employment has not returned to its prerecession levels, and job growth is weaker than in urban counties. Between 2007 and 2015, rural areas lost 400,000 jobs, whereas urban areas saw a net gain of 3.6 million jobs. Agricultural areas in the Great Plains, Midwest and South have been losing employment and people for some time. Adding to this are recent losses in rural manufacturing jobs in the Midwest and on the East Coast. Even rural recreation-based economies have struggled, with less growth seen since 2010 than in previous decades. A December Wall Street Journal article called rural America the worse off “in terms of poverty, college attainment, teenage births, divorce, death rates from heart disease and cancer, reliance on federal disability insurance and male labor force participation” when compared to urban or suburban areas.

Traditional capital resources are suffering. Small loans (under $1 million), usually provided by smaller banks which have traditionally funded rural businesses, have fallen from 40 percent of all loans in 2004 to less than 20 percent of bank loan portfolios in 2016. These banks are making fewer small loans, precisely the type of investment on which rural businesses rely.

Nontraditional private investors other than banks (private equity, venture capital, etc.) are all but absent when it comes to rural areas. Since 2000, only 1 percent of these types of investments have been made in rural communities, even though 15 percent of the U.S. population lives in rural locations.

State Action

While very few states require private investors to invest in rural areas—2.6 percent of the 1,827 state economic incentive programs require rural investment—some states are taking steps to encourage it.

Invest CT— the Second Insurance Reinvestment Fund Tax Credit—was passed by the Connecticut legislature in 2010. This program ties job-creation requirements to incentives for capital investments. Invest CT proved that private-sector investors could be asked to meet job-creation metrics through their investments, subsequently improving the return on investment for the state. In its 2017 annual report, the Connecticut Department of Economic and Community Development (DECD) found that Invest CT returned $5.11 of new state revenue for every $1 of state tax credits issued between 2010 and 2016. The report stated that “the new credit program requires closer monitoring and penalties for not achieving a positive return to the state, and the program has generated strong results in terms of jobs and state net revenue created.” On average, 4,133 new jobs have been created annually between 2011 to 2016.

Several states have looked into rural jobs acts, which provide tax credits to those who invest in designated rural counties. State tax credits are awarded to companies that agree to invest in or loan money to funds set up by investment firms or other brokers. The funds then invest the money in rural businesses.

The Georgia legislature enacted the Agribusiness and Rural Jobs Act in 2017. This law provides a mechanism for small businesses that have at least 10 percent of their portfolio in agribusiness in rural parts of the state (communities with 50,000 or less) to access capital. Ohio amended its appropriations bill in 2017 to authorize a nonrefundable tax credit for insurance companies that invest in rural business growth funds certified to provide capital to rural and agricultural businesses.

Pennsylvania’s Department of Revenue created a rural jobs and investment tax credit “designed to stimulate growth and job creation by providing access to capital for rural businesses from businesses supporting the state’s rural growth funds.”

In Utah, where only 1.1 percent of private equity investment goes to businesses in rural areas, the governor set a goal of bringing 25,000 new jobs to rural areas in the next four years. The Legislature responded by adopting a joint resolution to encourage business expansion and development in rural areas and enacting the “Rural Jobs Act” (SB 267) in 2017. This act provides a nonrefundable tax credit for investments in eligible small businesses primarily located in rural counties. This the new program will offer up to $24.4 million in credits if investors raise $42 million for rural businesses. This Utah effort is similar to state “new markets” programs, in which states generally provide tax credits worth less than the total raised by funds.

Similar bills have been introduced in 2018 in Alabama, Kentucky, Massachusetts and Washington.

Federal Action

The Federal Department of the Treasury initiated the Federal New Markets Tax Credit (NMTC) program, encouraging private funds to be raised and invested in qualifying underserved communities. The program mandates 20 percent of investments be in nonmetro areas, which has led to over $10 billion being invested in rural America since 2003. Some states have since adopted their own version of this program.

The Opportunity Zones Act, included in the 2017 U.S. tax reform bill, offers up to 100 percent forgiveness of the capital gains tax for investors willing to invest in distressed census tracts for a stated duration, including underserved rural communities. States select the census tracts in their state that qualify for these potential investments.