Report and Recommendations of the Commission’s Economic Development Subcommittee: Center for Tobacco-Dependent Communities

Background. Tobacco farming is broadly distributed across 568 counties, mostly in the southeastern United States. Tobacco is grown in most counties of Kentucky, North Carolina and Tennessee. It is an important part of both the economic and social fabric of communities in parts of other states, including southern Virginia; the coastal plain of South Carolina, Georgia and Florida; and southern Indiana, Ohio and Maryland. The largest flows of tobacco income are in the counties of the coastal plain of North Carolina, where farm tobacco sales generally run between $20 million and $50 million per year — in addition to significant income from stemming and redrying operations. Tobacco sales average between $1 million and $9 million in most other tobacco-growing counties.

The Commission recognizes that some communities are more vulnerable to declining tobacco production and income. Traditionally, economists estimate the economic vulnerability to reductions in tobacco production by determining the share of a county’s total income derived from tobacco farming. Using the tobacco income to personal income ratio, USDA’s Economic Research Service concluded that 80 to 214 counties may be particularly vulnerable. Of the 568 tobacco-growing counties, 28 had tobacco income to personal income ratios exceeding 10 percent, 52 counties had ratios of 5 percent to 10 percent and 135 counties had ratios between 1 percent and 5 percent. The remaining 353 counties had ratios under 1 percent. Using just this measure, 80 counties can be identified that are particularly dependent on tobacco and potentially the most vulnerable to declining tobacco receipts. The 135 counties with a ratio of 1 and 5 percent may also be vulnerable, depending on the stability of other local economic activity.

Other analyses have examined proximity to metro areas as an indicator of vulnerability to the decline in tobacco income. Such analyses find counties in or adjacent to growing metropolitan areas — whether small cities such as Danville, Virginia, or Rocky Mount, Greenville and Goldsboro, North Carolina, or larger cities such as Lexington and Louisville, Kentucky or Knoxville, Tennessee — account for 73 percent of estimated tobacco receipts. Proximity to population centers usually means more immediate opportunities for non-farm jobs, rising land values and a ready customer base for non-tobacco farm products such as fruits, vegetables, pick-your-own and other on-farm business ventures. In a sense, proximity to metro economies often means that these communities are less dependent on tobacco income. However, a large number of the 568 tobacco counties (193 counties, or 34 percent of the total) are not adjacent to any metro area. Though these counties account for only about one-fifth of tobacco receipts, the tobacco farmers who live there and their communities face greater challenges in finding non-tobacco income and are therefore more dependent on tobacco and vulnerable to changes in the tobacco-growing industry.

More analysis of county-level economic conditions is needed to gain critical information on the actual vulnerability of a county to reductions in tobacco-related activities and to help

identify those most in need of economic development assistance. It is especially important to identify the full range of economic links in a county’s economy that are directly attributable to

various tobacco-related activities, including the so-called "multiplier," or secondary, economic effects that can measure the extent to which other businesses rely on the circulation of tobacco receipts. Also significant are the degree to which the tobacco industry is vertically integrated in a community, the degree to which a county’s economic base is diversified and the extent to which a county is dependent on other declining sectors. Broad measures of long-term economic distress such as relatively high poverty and unemployment rates are general indicators of local economic vitality that should be considered in any vulnerability analysis.

Resources and Gaps. Existing federal and state programs for economic and community development can provide substantial resources to help transitioning tobacco-producing communities develop new on-farm and off-farm enterprises. Programs range from grant and loan funds for water and sewer and other industrial infrastructure to technical assistance grants for small-crop agriculture and development of small businesses. Communities may avail themselves of such resources and can seek assistance from their state and local economic and agricultural development offices for help with program requirements and application procedures.

Additionally, a unique opportunity for tobacco-dependent communities may be the financial assistance available from the Master Settlement Agreement, at least in those states that are making a share of their settlement funds available for economic development.

A major gap is the inability of small communities, not well practiced in the intricacies of economic development and diversification, to access available assistance and funds. While both states and communities list planning and readiness as critical to the formulation of proposals that will have long-term impacts, many tobacco-dependent communities do not have the resources to do the initial planning.

Furthermore, they often lack the expertise to identify the most advantageous economic development opportunities for their communities to pursue. And for those farmers that want to develop non-tobacco crops, the technical assistance is hard to find to make the most of supplemental crops or other business alternatives. In some cases, both tobacco farmers and their communities lack the funds and expertise necessary for start-up businesses in tobacco-growing and non-tobacco enterprises.

The needs and problems of tobacco-dependent communities are diverse. And they will not all be solved with financial assistance. Some farmers want to remain in farming but need to shift their primary emphasis from tobacco to other crops. Other tobacco farmers may want to explore non-farm business ventures. Workers whose livelihoods depend on tobacco warehouses or stemming and redrying operations may have few transferable skills and need retraining. The community businesses that support tobacco growers and other tobacco-related workers and rely on tobacco income for their livelihoods are faced with the need to change business or perish. Making funds available for economic development is simply not sufficient to help communities and individuals with such diverse needs.

While the tobacco-growing states have substantial financial resources at hand to support community revitalization, few — if any — are set up to provide the programmatic support that tobacco-dependent communities and farmers need to make the successful transition from a single-crop agricultural economy to a thriving, more diversified economy. Therefore, the Commission does not propose substantial additional financial resources for economic development. Rather, we believe the challenge is to identify existing resources, use them efficiently and effectively to develop strong in-community capability and infrastructure and create a learning network among tobacco-dependent communities.

Recommendation: Center for Tobacco-Dependent Communities. An inextricable link exists between the well being of tobacco farmers and their communities. That link is clearly recognized in the name of this Center. Based on the Commission’s findings, research, and testimony from farmers, community leaders, and policy makers, the Commission recommends the creation of a regional center that will work closely with tobacco growing communities to stem the decline due to changes in the tobacco growing sector and help farmers and communities transition to more diversified and resilient local economies.

The Commission recommends that Congress create a regional center to assist communities in making the transition from tobacco-based economies. The proposed legislation should:

Authorize the establishment of a non-profit corporation — the Center for Tobacco-Dependent Communities — that is not an agency or other entity of the United States government.

Authorize a seven-member Board of Directors for the Center, six of whom shall be appointed by the President and confirmed by the Senate, with no more than three members from one political party. The seventh member will be the Center’s Executive Director, to be appointed by the Board.

-- Board members shall be eminent in rural development issues — especially small-crop agriculture, entrepreneurship, and industrial, small business and community development — and shall have experience and knowledge appropriate to the responsibilities of the Center.

-- Board members will serve staggered four-year terms, with three members serving an initial two-year term and three members serving an initial four-year term.

Authorize funding for the Center at $5 million annually for at least 10 years through revenues from the Commission’s proposed 17-cent increase in the federal excise tax on every pack of cigarettes sold in this country.

Authorize the Center to receive, in addition to public funds, private bequeaths, donations and foundation and other grants.

Direct the members of the initial Board to serve as incorporators and authorize them to take whatever actions are necessary to establish the Center for Tobacco- Dependent Communities.

Direct the Center to serve the 568 tobacco-producing counties identified by USDA’s Economic Research Service, with particular focus on counties that the Center determines are the most dependent on tobacco for revenue.

Establish that the purpose and objective of the Center is to be an active agent of economic and community development assistance for communities to transition from tobacco-based economies. The emphasis of the Center will be on agricultural development — including sustainable and other small farm agriculture, and alternative uses of tobacco that do not harm the public health — and entrepreneurship, and will specifically provide outreach and education activities to farmers and small communities with limited capacity to access current resources. In keeping with this purpose, the Center shall:

-- Provide communities and farmers with targeted technical assistance.

-- Convene meetings and conduct workshops and conferences.

-- Act as a clearinghouse for best practices.

-- Provide research and policy development.

-- Advocate for communities transitioning from tobacco-based economies.

-- Provide up to $1 million each year for grant-making activities such as challenge grants, community mini-grants, technical assistance grants and pilot demonstrations.

In order to leverage federal economic and business development program funds (grants and loans) and create an interagency awareness of and commitment to transitioning tobacco-based economies at the federal level, the Commission recommends that the President create a federal interagency working group at the assistant secretary level. This interagency effort, including USDA, the U.S. Department of Health and Human Services and U.S. Department of Commerce and other agencies as appropriate, will be responsible for coordinating and targeting federal economic and business development program funds (grants and loans) for tobacco-dependent communities. The working group should take advantage of input from and consultation with the Center for Tobacco-Dependent Communities.

In conjunction with recommendations under TERP, the Commission recommends creating market incentives for tobacco farmers, quota holders and others receiving Phase II and other compensation or indemnification payments. The purpose is to encourage use of those funds as capital for new business ventures, on-farm or off-farm, that have the potential to create new economic activity and community revenues in tobacco-dependent communities. The incentive should be market based; for example, preferential tax treatment if the funds are invested within a certain amount of time for business activities.