Incentives. When the subject turns to economic development, most cities and states almost immediately think of incentives. People engaged in business attraction (and business retention, too) feel like they can’t compete unless they have an array of financial and other incentives to offer to executives.
In fact, I can’t imagine a discussion of economic development without it eventually turning to incentives.
Most economic development officials look at incentives as a way to “level the playing field” so that they can compete with other communities and states. Politicians (and most local newspapers), on the other hand, seem to like them only during the election campaign season.
After all, being an advocate for economic development ranks second only to being an advocate for our children’s education in most local elections. Otherwise, they tend to look at them as an unnecessary waste of tax dollars that could be better spent on other programs.
| Don’t get me wrong. I have absolutely nothing against incentives. Communities and states have to do what they feel they have to do. But ask yourself this: Why do local officials feel they need to “level the playing field,” anyway? How did it get “un-level” in the first place? Not to appear overly flippant, but a good place to look is in the mirror. |
Don’t get me wrong. I have absolutely nothing against incentives. Communities and states have to do what they feel they have to do.
But ask yourself this: Why do local officials feel they need to “level the playing field,” anyway? How did it get “un-level” in the first place? Not to appear overly flippant, but a good place to look is in the mirror.
No, I’m not saying that politicians have a major impact on our $10+ trillion economy. They do, however, play a role in making one state less attractive than another state to businesses.
Let’s face it. The main reason incentives are important in the competition for business is to make a more expensive place less expensive. For some states, it’s simply a matter of applying a small bandage to cover a minor scratch. For other states, it’s almost like wheeling a patient on life support into the emergency room.
Where is the Tax Revenue Coming From?
Obviously, all forms of government require revenue in order to provide services. The important question for business executives is how that revenue is obtained.
Does it really matter how high (or low) the corporate income tax rate is in a particular state if your business operation is not subject to corporate income tax anyway? Likewise, a stiff inventory tax is not an issue for your regional headquarters location. Same theory for all other forms of taxation: If it doesn’t apply to your particular operation, don’t waste time worrying about it.
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However, if a state derives most of its annual revenue from a particular form of tax — and that tax is something your facility will pay — you have to realize that your company may be shouldering the burden the next time state tax revenues decline and the state needs more money.
How Bad Is the Tax Bite?
This is pretty simple and straightforward. Forget the politics. Taxes, from a business perspective, are an expense, and companies are always looking for ways to cut expenses.
While it’s only one metric, a good way to get a feel for the overall tax burden is to look at tax revenue per capita. For example, in Texas, it is $1,316, while in Hawaii it is $2,838.
Are They Maintaining the Infrastructure?
Most governments face no shortage of demands when it comes to spending. However, is the government focused on maintaining the basic transportation infrastructure of the state? How about public education?
These are generally the two big-ticket areas when it comes to state government spending and, particularly in times of tight budgets, lawmakers are inclined to cut a little in those areas in order to spend that money on another program they favor. While this may not be a big deal every once in a while, states that do this on a year-in and year-out basis are creating a ticking time bomb for local taxpayers, including businesses.
Want an example? Look at your states roads and bridges, which are a classic victim of deferred maintenance. After years of neglect, many are in urgent need of repair, and fixing them becomes even more expensive. And where does the money come from? You.
Are They Mortgaging the Future?
Debt has often been called a “gift” from one generation to the next.
How is the state managing its debt? For a short-term assessment, look at how much of its annual budget is devoted solely to paying interest on its debt? Want the big picture? Look at the state’s total debt and compare it with its total revenues for the current year. Another good indicator would be to look at the state’s total debt per capita.
Remember, the source of revenue for a government is through taxation, and the only way these things will get better is if you pay for it. Just as it would look closely at debt when considering acquiring another business, so too should a company look at debt when comparing locations in various states.
How much are they spending on themselves?
This is certainly not a major issue, but it’s one worth at least looking at. How much of the state’s general budget is consumed simply in administering the government?
Do they have
Right-to-Work laws?
Make no mistake about it. Those states that have right-to-work laws use that fact aggressively when recruiting businesses. It’s not our intention to get wrapped up in a philosophical argument over whether right-to-work laws are a good or bad thing.
After all, having right-to-work laws does not preclude unions from organizing and operating in that state, any more than it means that not having right-to-work laws means that there are no unionized work places in that state.
We also understand that salaries for non-unionized workers are, in many cases, higher than for union workers. While certainly important, however, the main issue for most employers is work stoppages.
Therefore, it is important to look beyond the mere fact of whether a state is “right-to-work.” Look at National Labor Relations Board (NLRB) statistics for unionization activity and, definitely, look at the area’s history of work stoppages. In the long run, those are more revealing that simply being “right-to-work.”
Are Things Getting Better or Worse?
It’s pretty hard to do your due diligence without looking at the trends.
Pick whichever categories are important to your operation — things such as reliance on corporate income tax, tax revenue per capita, spending on basic infrastructure, the state’s debt service ratio — and compare the current situation with what it was five years ago. Is it getting better or worse?
The Bottom Line
Politicians love to take credit for a good economy, but are nowhere to be found during bad economic times. However, blaming them in either case is probably a gross oversimplification.
It’s a lot like handing a gnat a baton and telling him to direct the local philharmonic orchestra. In the gnat’s mind, he’s responsible for all that beautiful music. Ask a member of the orchestra, though, and she’ll probably say, “What gnat?”
What governments do, however, is create the environment in which the local economy operates. They inject certain costs while, at the same time, provide the infrastructure upon which local commerce operates.
Some do a better job than others, making it less expensive for a business to operate there. That’s the real impact of government on business.
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