Nothing quite gets the juices flowing like a spirited argument over economic development incentives. Some people love them, others hate them, but nobody’s indifferent.
Some incentives, like state work force training programs, are statutory and are granted to any company that meets the prescribed standards for new job creation. Others are more discretionary and are granted on a case-by-case basis, and it is these incentives that create the biggest stir.
What is often ignored is that incentives do not exist in a vacuum. In fact, they generally exist to help mitigate a condition that otherwise makes a particular location uncompetitive.
For example, enterprise zones exist to bring employment opportunities to chronically high unemployment areas. In return for locating in a particular geographic area and, usually, for hiring people who live within that high unemployment area, a business will receive certain tax benefits. Tax increment financing (TIF) programs exist to entice development to rundown and impoverished areas. Some states, like North Carolina, have incentive programs tied to rural poverty rates.
In any case, the public benefit is clear, or at least it should be.
What most of the more discretionary incentive programs have in common is that, but for the incentives, the development or project would never occur. This “but for” criteria is at the heart of responsible use of incentives.
Given my job, I talk to a lot of people about economic development incentives. Those on the corporate side of the deal — the recipients of the incentives — say that incentives do not come into play until they have reached the “short list” phase, when the decision is between two or three sites, each of which would be an acceptable location.
Those on the public side of the deal — state and local economic developers who are the givers of the incentives — have a level of distaste for incentives that is usually directly proportional to the frequency with which they are forced to offer those incentives. In other words, the more they have to offer incentives, the more they hate them.
The rub, as I mentioned earlier, is that incentives almost always are used to mitigate other factors — higher local wages, more expensive real estate, inadequate transportation infrastructure, higher taxes and fees, inadequate work force quality, deteriorating infrastructure, high crime — that would otherwise eliminate that particular site from consideration.
That’s because these types of sites come with added risks and costs and, as such, need economic development incentives to offset or balance those risks and costs. Otherwise, productive development at those sites would likely never take place. It has always seemed to me that this is a reasonable use of tax dollars.
In truth, the real issue is not the use of economic development incentives, but rather the particular circumstances that make their use so critical to local business attraction and economic development.
Unfortunately, those problems do not go away simply because an individual economic development incentive package was put together in order to make the numbers work for a particular project. Those circumstances — higher wages, expensive real estate, higher taxes and fees, inadequate work force quality, etc. — will continue to exist, and they will continue to require future mitigation in the form of incentives until those non-competitive factors are themselves corrected.
Want to get rid of incentives? Then fix your underlying problems, or else be prepared to see more businesses expand or relocate elsewhere.
Not all programs are specifically geared toward fighting poverty, though. Many exist to attract higher-paying jobs to the local community, and they usually have the tax benefits tied to specific job creation targets.
That’s because these types of sites come with added risks and costs and, as such, need economic development incentives to offset or balance those risks and costs.
Bill King is the chief editor of Expansion Management magazine and can be reached at BillKing@Penton.com.