Economic development incentives — the enticements (usually in the form of tax abatements) federal, state and local governments and economic development organizations use to convince a business to locate in their community — have been around for a long time.
Let me say at the outset that in my opinion economic development incentives aren’t inherently good or bad or right or wrong. They’re simply tools that when used properly can create tangible benefits for a community.
Many see the incentives as necessary tools to promote economic development and wealth creation, and the incentives are viewed as a necessary cost to produce these social benefits. In very simple terms, the objective is to increase a region’s tax base, create jobs and stimulate the economy.
To use a sports analogy, think of incentives as the “free agency” system of economic development. In the same way that a professional sports team looks to free agency as way of attracting quality players to improve their team, economic development professionals see incentives as a way of attracting quality employers to create wealth in their communities.
Others, and the numbers are growing, are highly critical of incentive programs. The criticism centers on the amount of the incentives awarded each year, estimated to be at close to $50 to $70 billion, and the lack of a consistent and reliable method of calculating a return on investment. They argue that at a time when budgets are being slashed, states shouldn’t be forgoing tax revenue. They also claim that the development may have occurred without the incentives.
The concerns about the tax abatements’ negative impact on state budgets motivated the Governmental Accountings Standards Board (GASB) to propose a set of “uniform minimum disclosure requirements on financial statements of governmental entities.” All government entities would be required to report all tax abatements on their financial statements.
Sounds fair to me.
What would be fairer is if they also accounted for the additional revenues in the financial statements as well.
A company comes to town, receives incentives in one form or another, hires employees, opens its doors and starts doing business. As a result of all that activity, revenue is generated. The employees are paid and spend money in the community thereby creating tax revenue that otherwise might not have been generated. The company purchases “stuff” that, depending on the incentives, may or may not generate sales tax. It does, however, generate revenue for the company from which they purchase the “stuff.”
You get the idea.
My point is that it’s an inaccurate statement to say that because of the incentives granted to it, Company X cost the state and/or municipality so much in tax revenue. It would be more accurate to account for the additional revenue that “but for” the company might not have been generated otherwise.
It’s a difficult calculation; far more difficult than simply calculating the total cost of the incentives, and probably why few are doing it.
The true cost (or benefit) is the difference between the cost of the incentives and the revenue the company generates.
How necessary are incentives anyway? At one time, incentives may have been a more important part of a company’s decision-making process than they are today.
Companies today are looking at a number of variables when deciding to locate or relocate, such as:
A qualified workforce.
- Available buildings.
- Access to transportation (highway, rail or air).
- Energy availability and costs, etc.
Incentives more often than not have become tiebreakers. “All things being equal, Community A is offering more incentives than Community B.”
Again, economic development incentives aren’t inherently good or bad or right or wrong. It’s the manner in which they are applied and whether they generate the economic benefit that’s important.
To that end, I support developing and applying a better and consistent set of metrics to evaluate the “promise” versus the “reality.”
One thing is certain, no state or municipality is going to stop offering incentives on their own. Unilateral disarmament doesn’t usually work to the advantage of the one disarming.
Paul Grasso is the President and CEO of The Development Corporation (TDC)