An Analysis of Nevada's Proposed Innovation Zones Law

A legislative analysis of Nevada's interesting new proposal for "Innovation Zones."

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Overview

Nevada Governor Steve Sisolak announced in his January State of the State Address a proposal to create "Innovation Zones," new county-equivalent jurisdictions aimed at attracting tech companies and economic growth to the state. It is always exciting to see a zone-based approach to economic development in the United States, given the country's relatively limited experience with the use of special economic zones and other special jurisdictions. Below is an analysis of the draft Innovation Zones bill currently circulating. Before the legislative analysis, a few high-level thoughts:

  • Nevada and Governor Sisolak should be applauded for pursuing an innovative approach to economic development and innovation that does not rely on ineffective and wasteful tax incentives.
  • Much of the reporting about what the Innovation Zones bill would actually do has been misleading or lacking in nuance. For instance, this story by the Associated Press gives the impression that this bill would essentially allow tech companies to start company-run towns. As the analysis below details, while the Innovation Zone applicant retains significant control over the jurisdiction early on, that entity's control over the jurisdiction quickly recedes and democratic governance mechanisms are introduced.
  • Once administratively up and running, an Innovation Zone functions more or less as a new county government. It carries virtually all of the same rights, obligations, and duties of a Nevada county and its public officials are subject to the same laws as public officials elsewhere in the state. The same is true of Innovation Zone courts or school districts. The principal difference is that it is organized around the development of a particular type of technological innovation, such as the blockchain, renewable energy, and others.
  • The extent to which Innovation Zones are similar to existing county governments is actually a bit of a disappointment and left me feeling underwhelmed given the social media excitement. Greater regulatory and administrative freedom in particular would have nice to see. However, Innovation Zones are still a welcome development and there is room for significant improvement in local governance under the proposed framework.

 Legislative Analysis

This analysis is based on the version of the Innovation Zones bill found here. This version of the bill is available for download below. I have chosen to omit sections of the bill from the analysis below if that section consists entirely of housekeeping materials that do not warrant mention. Some housekeeping sections are presented without commentary.

Section 1.5 — Declaration of purpose

From the bill: “The traditional forms and functions of local government political subdivisions existent under Nevada statute are inadequate alone to provide the flexibility and resources conducive to making the State a leader in attracting and retaining new forms and types of businesses and fostering economic development in emerging technologies and innovative industries.”

This is particularly interesting. A state is willing to acknowledge that the current structure of local government in the United States is not well-suited to support the development of new technologies and industries. This is a break from the Tiebout-style competition between cities like Austin and Miami aimed at capturing significant shares of the tech community as it departs the Bay Area.

Section 10 — Setting scope of the zones and oversight authority

Innovative technologies include:

  • Blockchain
  • Autonomous technology
  • Internt of Things
  • Robotics
  • Artificial intelligence
  • Wireless technology
  • Biometrics
  • Renewable resources

The Executive Director of the Office of Economic Development retains the power to amend the Innovation Zone regulations and the power to designate additional technologies as innovative

This is great. An ambitious Executive Director of the Office of Economic Development could really push the frontier of technological development in Nevada. It’s also important that the program is housed entirely under the Office of Economic Development. This will ensure that administrative and regulatory matters regarding Innovation Zones are streamlined and not subject to the whims of other state agencies and offices.

Section 11 — Applicant and zone plan requirements

Applicants must describe the technology designated for their proposed zone and must possess specialized knowledge or experience with that technology.

Not just anyone or any firm can create a zone. This minor bit of gatekeeping will ensure the program remains focused and accessible to credible applicants.

The applicant must provide a description of the proposed development, including planned infrastructure and residential/commerical/industrial land use designations.

There is a clear opportunity here to create smart, walkable communities and transit-oriented development. It's good that the state government recognizes that Innovation Zones should not just be industrial parks, but actual new communities.

Applicants must provide an estimate of construction jobs created, as well as 10 and 20 year permanent employment estimates and economic imapct assessments.

It's good that the state isn't setting minimum requirements. This might actually incentivize the developer to produce realistic development plans, rather than simply game their proposals to meet an arbitrary metric.

The innovative technology specified for the zone must be deployed in the zone. This presumably applies to innovative technologies generally.

This is basically saying “smart cities” without saying it. While I am personally very skeptical of any “smart city” proposals, it is encouraging to see the state pushing for the greater use of innovative technology in the public sphere and built environment.  

Applicants must have made a minimum capital investment of $250 million within the territorial boundaries proposed for the zone prior to submitting an application. The applicant must also commit to an additional $1 billion in investment within the first 10 years of the zone being approved.

This is complicated. Requiring the investment of $250 million prior to being declared a zone is a lot of money to invest for an uncertain payoff. But so long as the proposed zone development clearly falls within the designated parameters, this should not be a problem. This requirement is good in that it’s a signal of credible commitment by the applicant. One can reasonably expect this developer to actually create the governing institutions they’re required to, and to do so in a quality manner—their incentives are aligned with the long-term success of the zone. The additional $1 billion commitment requirement further aligns those incentives.

The applicant must certify that they can secure the natural resources and utilities to support the zone.

Perhaps it should be taken as a given that this will happen anyway, but considering that Nevada is in the desert and that water resources are limited, this seems like a good thing to consider preemptively.

The zone must impose an industry-specific tax or fee on the innovative technology industry or activities related to it. An estimate of the financial benefit that will accrue to the State from the tax or fee must also be submitted.

A lot of Innovation Zone supporters will presumably be upset about this provision, but it makes sense. This is essentially a revenue sharing agreement between the zone and the state government that aligns the interests of the latter with the former. Why should the state roll back concessions granted to Innovation Zones when it could disrupt an easily acquired revenue stream? 

Zones must comprise at least 50,000 contiguous acres (78.125 square miles) of undeveloped land owned or controlled by the applicant. This land must be located in one county and not be a part of any existing city, town, tax increment area, or redevelopment area. There can be no preexisting permanent residents within this area.

These are good requirements. 78 square miles is a big area, zone developers can do a lot with this. There is plenty of room to build up a proper city and industrial areas (like solar fields or a Telsa-like battery plant, for instance) over time. Undeveloped land with no existing occupants, towns, etc is great, because it necessitates that living and working in an Innovation Zone is entirely voluntary. The single-county also useful as it makes the coordination in providing services much easier.

Section 12 — Public hearings

There must be public hearings within 60 days of the submission of an Innovation Zone application. This application must be accepted or rejected within 30 days of the hearing. Application decisions may be taken to court for a final resolution.

This invites trouble in the same way that discretionary review, etc invites trouble from NIMBYs with respect to new housing development, but is probably an unavoidable inclusion. An Executive Director of the Office of Economic Development that is committed to the development of Innovation Zones will hopefully make the right decisions.

Section 13 — Existing government entities may not preempt the development of an Innovation Zone

After an application has been submitted, the state, local governments, public agencies, etc cannot employ eminent domain or condemn any property, create local improvement, tourism, economic development, tax increment, redevelopment, or general improvement districts, or develop parks, trails, etc on proposed Innovation Zone territory. The state and local governments cannot pledge revenue from property or taxes in the zone for payment of general of special obligations after an application has been submitted.

Great foresight here. Anti-zone government entities are prohibited from swooping in at the last second to derail a proposed project because they are opposed to it.

Section 14 — After the application is approved

Once approved, an Innovation Zone immediately becomes a local government entity and political subdivision with powers and duties of a county. The governing body of an Innovation Zone is the Board of Supervisors. The powers of this board are identical to those of any other county supervisor. Their authority supersedes that of the surround county government. Ordinances passed by this Board supersede ordinances in the surrounding county.

Political authority is very clear—the zone governs itself.

The surrounding county is responsible for county-level powers and duties within an Innovation Zone until the zone affirmatively intendeds to exercise those powers.

Great foresight here. A newly declared zone shouldn’t automatically become responsible for law enforcement, schools, etc. Zones should exercise these functions when they have the capacity, resources, and population to justify doing so.

Sections 15 and 16 — Appointing of the Board, Board salaries

The governor appoints the Board within 270 days of the creation of the zone. The Board has three members, two chosen from a list of five provided by applicant to the governor. The governor picks the third Board member that is not a candidate provided by the applicant. Board members must be residents of Nevada. Board members may not have a pecuniary interest in the applicant or have a commitment in a private capacity to the applicant.

This is great. The vision of the applicant can actually be executed because the Board is comprised of a majority of members they selected. 270 days from the declaration of the zone is more than ample time for prospective applicants to change their residence to Nevada, if needed. No financial interest in the applicant is good housekeeping.

Two Board members serve for a two-year term and one serves for a four-year term. Four years after the initial appointment, members can be reappointed. New members are appointed the same way.

I think longer, staggered terms would be better but this seems reasonable. The applicant retaining control of the Board member pool is good, it prevents a hostile governor from coming in and derailing a zone before it can even get off the ground.

Board members are public officers under Nevada law, the same as in any other Nevada jurisdiction.

This is important. This is not corporate governance—Board members are public officials held to the same standards as any other public official.

Officers and employees of the zone must be paid salaries at least commensurate with similar public officials. Board members must be paid the same as Nevada county commissioners.

This is good as it leaves open the potential of compensating public officials particularly well, which can attract better talent. Paying Board members the same as county commissioners further entrenches the idea that Innovation Zones are on equal footing with counties.

Section 17 — Restrictions on Board activities

The Board cannot impose property, fuel, or sales taxes, or fees, for county-provided services until they assume all duties and responsibilities of country government. The Zone is also prohibited from receiving disbursements of local government funds from the state.

This seems to suggest that a zone cannot raise revenue until it is prepared to assume all government functions. But how can a zone be prepared to assume all government functions if it is not raising any revenue ahead of time? Seems unclear.

The applicant remains responsible for any contractual obligations or other restrictions tied to the land they own. The Board may assume these responsibilities.

Straightforward that the applicant should retain their obligations— declaring a zone is not a get out of jail free card. But it is also good that the zone can take over these obligations and unify the structure of responsibilities tied to the land.

Section 18 — Tax and fee powers  

The Board may impose any taxes and fees authorized to be imposed by a county. If the zone is going to assume control of a service previously provided by the county and charge for it, the zone must give 60 days' notice to that county. Taxes and fees imposed do not take effect before the zone assumes responsibility for a service.

It's great that zones have the full tax power of counties, although greater independence to determine tax policies would have been ideal. But this subsection is why the tax powers appear unclear—this subsection seems to imply that taxes and fees can be imposed piecemeal regarding county-level duties (meaning that you could charge fees for a county service the zone assumed responsibility for but not charge fees for a service the zone did not assume responsibility for) which conflicts with the requirements in Section 17.2a, which require the zone to assume all duties of a county.

The Board may license businesses and impose a license tax.

This does not appear to require the Board to do so explicitly. Depending on the requirements of Nevada licensing law, there might be a small opportunity here to introduce marginal licensing regulatory reform.

Section 19 — Establishing a judicial district

A zone can establish a new judicial district. Until this is done, the previous township court has jurisdiction over zone territories. The Board must give 60 days' notice to that township court if the zone is taking over judicial responsibilities. The zone court has jurisdiction for any cases filed on or after date on which it takes effect, but previous cases remain the jurisdiction of the old court.

This is great. Starting a new court from scratch affords a lot of opportunities to innovate with court technology to improve processes and lower costs and time to resolve disputes.

Sections 20, 21, and 22— County-level duties

County-level duties that a zone will be responsible for include the county clerk, recorder, sheriff, treasurer, assessor, auditor, public administrator, and the district attorney. A zone can create new county offices or consolidate existing offices. All appointed officers must be Nevada residents and serve four-year terms.

This is good— a zone clearly assumes the full powers of a county government. The freedom to adjust the structure of the government as necessary is a plus.

The Board can enter into cooperative agreements with other local governments (the surrounding county or local governments within that county) to provide services.

This is great. If the zone does not have the capacity to perform a function itself or if the two jurisdictions would be best served by a single service provider, this allows for that to be contracted.

The Board does not exercise control over county clerk/voter registrar duties regarding elections until after an election is held pursuant to Section 30.

The zone is barred from governing elections until an election has been held, this is a reasonable and democratic requirement. See below for details on elections within Innovation Zones.

The Board must give notice of intent to assume all duties of a county to the surrounding county. The same conditions for the school district Board of Trustees apply. School district duties may be adopted separately from county duties. After the agreed upon transition date, surrounding county officials no longer have any authority within the zone and may not impose any taxes or fees within the zone. The restrictions on the county clerk/voter registrar regarding elections continue until the conditions under Section 30 are met. Surrounding county ordinances no longer apply within the zone.

This will ensure a smooth and orderly transition of power. The authority of a zone is clear and absolute. It is sensible to separate the requirements provision of other services from schooling.

Section 23 — Court-specific and other duty requirements

A zone must establish a court when invoking the assumption of county-level duties under Section 21. The zone must assume and previously unassumed duties.

This raises the same confusion raised above about the piecemeal or all-or-nothing approach to the assumption of county-level duties.

Sections 24 and 26— School district requirements

Board members act as Board of Trustees members until the Board of Trustees is established. Once the school district is established, it is entitled to any revenues entitled to other school districts and is subject to any laws pertaining to school districts. The Board is required to impose property taxes for the purpose of funding the school district. If a zone forms a school district, it will receive education funding from the state. If the zone does not form a school district, those payments continue going to the surrounding county.

A zone may create public schools, contract for charter schools, contract with an existing school district, or implement any combination of these options to provide education.

Zone-based school districts are identical to those in any other jurisdiction. Notable that the law requires the zone to finance education via property taxes and seemingly does not allow for other funding mechanisms. Also notable that is broadly permissible of school choice, a plus.

Sections 25 and 27 —  Property and other taxes

Property taxes must be implemented at the maximum rate allowed by statute, along with any other property taxes required of counties. Any taxes required to be implemented by counties must be implemented by a zone. Zones that form a school district must create a specific local school support tax.

The maximum rate imposition might be an attempt to avoid Tiebout-style competition over tax rates between jurisdictions.

Section 28 —  Fuel taxes

A zone must impose required taxes on fuel, aviation fuel, and fuel for jet or turbine powered aircraft, and can approve additional fuel taxes. The zone may not issue a business license for the sale of fuels until the aforementioned taxes have been imposed.

Taxes on fuel discourage car use and are an important source of road maintenance funding. It's good to see these taxes mandated.

Section 29 —  Local government tax distribution

Taxes collected by the zone that it is entitled to receive back from the state will be delivered as provided under Nevada law.

Sections 30 and 31 —  Elections

Once a zone has 100 residents, there must be an election in the next election year. The term lengths and election laws that apply for public offices in Nevada counties apply in the zones. School board elections follow the same procedures as other public offices.

Depending on how quickly residential development in the zone is completed, democratic institutions could be adopted quite early in the lifespan of an Innovation Zone. Corporate-like governance is replaced very early on, although it's likely that voters in this new district will be well-aligned with the long-term goals of the zone.

Section 32 —  Biennial reporting

A zone must report to the legislature in even-numbered years: capital investment, infrastructure development progress, construction jobs created, licensed businesses, an economic impact estimate, tax revenue collected from the innovative technology tax and other taxes, any amendments to the zone development plan, and a description of the use of the designated innovative technology in the zone.

Sections 33 through 38 contain legislative housekeeping.