Economic development incentive

Overview of economic development incentives

Economic development incentives are defined as “cash or near-cash assistance provided on a discretionary basis to attract or retain business operations owned by large businesses”.^[1] Additional non-monetary incentives included promised exemption or relief from local and state regulations as well expedited investment and completion of public infrastructure projects. A large list of incentive practice and strategies is provided in the next section. The characteristic of incentive practices are varied in terms of expense and which level of government (federal, state or local) ultimately bears the cost of the incentives.

The goal of economic development incentives ultimately is to induce growth in targeted areas, providing new jobs and construction in stagnant areas while generating long term positive tax revenue for state and local governments. Theoretically tax breaks and government investments will lead to job growth and investment in blighted communities, eventually shifting centers of urban poverty into revitalized segments of the city.

Reasoning and justification

Though cities can use the broad justification of “development” as a justification for the use of incentives, there are four broad factors which influence a city or state government to use incentives. These are citizen’s needs, administrative capacities, fiscal needs, and a city’s current stage of growth.^[2]

Citizens need

A city with high levels of unemployment and poverty across many areas will often turn to development incentives as a manner of attracting businesses to generate new jobs. The lower the income of families across the city is strongly correlated with the tax concessions provided to businesses.^[3]

Administrative capacity

The capabilities of local bureaucrats can dictate which options if any cities take to provide incentives. Some incentives such as utility rate subsidies and direct loans are relatively simple in administrative terms. Other projects such as infrastructure improvements, tax increment financing and regulatory exemptions require complex interactions of administrative staff. If a city lacks the capacity to perform such projects, than the incentive cannot be implemented, even if it is the ideal program for the current economic conditions. Conversely a staff with specific skills can influence and pressure city administrators to implement specific incentive programs they are familiar with, even if the project is inappropriate and ineffective for the situation. The size and legal capacities of a city government and its staff are positively correlated with the frequency in which more complex incentives are used.

Fiscal need

Another factor which contributes to a city’s use of incentives is its current fiscal conditions. A city which is under fiscal stress, facing revenue and budget deficits, and experiencing slow growth or stagnation, has its own incentives to attract businesses. Cities under fiscal stress such as revenue shortfalls have other options which include increasing taxes and cutting staff and city services. These actions tend to be very unpopular leaving an administration vulnerable politically. Using Economic development incentives however, gives a city administration a more politically viable course of action.

City's current growth

A city’s current phase of growth affects how an administration decides to offer incentives. A large city with strong growth is actually less likely to offer incentives. Strong pro-growth policies and coalitions of private citizens and businesses tend to already exist in these cities, negating the need for incentives. Smaller cities and those in decline however are more likely to use incentives to attract businesses and ignite economic and population growth. Many times incentives are marketed to site selection consultants^[4] and corporate executives. Cities where the least amount of growth occurs or is possible feel the greatest pressure to provide jobs and will turn to incentives to attempt to generate these results.^[5]

Examples of incentives

The following are common examples of development incentives used by U.S. cities.^[6]

Industrial revenue bonds- Loan issued for the purchasing of capital, supplies, and construction costs or equipment.

Tax increment financing- Improvements in public infrastructure or private development are financed based on the expected future revenue that will be generated by the increased property value of the improved area.

Industrial enterprise Direct/subsidized loans- state and local governments can provide direct and subsidized loans to private businesses based on the promise that a quota of jobs will be produced.

Site advantage- Governments may provide potential businesses with free land, buildings, exemptions from local and state regulations, and other customized services for agree to develop a specific area.

Tax incentives- government provided reduction in tax liability for a defined period without expectation of repayment. The lost revenue will theoretically be made up by the generation of new jobs in the area in addition to the additional revenue the company will pay once the abatement period is over. Examples include property tax abatement, corporate income tax credit, and sale tax exemptions.^[7]

Public utility rate break (water, electricity etc.) - Utility rates are subsidized by the city for companies which launch construction projects within designated zones.

City projects/Infrastructure improvements- blighted areas are targeted for investment and improvement by state and local government to improve functions of the area and quality of life factors.

Criticism

There are many criticisms to the use of Economic Development Incentives, from the general theory behind the practice, to the individual structure of different incentive programs and ultimately the cost and effect of these programs on blighted areas.

A common criticism of incentives is that even as the programs are expensive, the incentives are generally not large enough ^[8] For example if a tax break on property taxes were to be offered across an entire city, the costs of wages, construction, transportation, new supplies and other factors associated with expansion are likely to be higher than the tax benefits offered.

A related criticism is that development incentives do not generate new businesses or jobs but simply move them.^[9] This can be especially true when individual areas of the cities are provided with incentives to attract business. In the previous example, new firms would not expand into a city offering reduce property tax rates because the overall costs of expansion are too great compared to the savings in reduced tax rates. When only certain areas of a city are provided with these incentives however, competition develops on an intra-city level. While an outside firm is still unlikely to expand into the area, it is likely that a currently existing business will move from one part of the city into the area. While a “new” business exists in the area targeted for redevelopment, it is unlikely to generate new employment. Real growth does not occur and the city is left paying for an ineffective incentive.

As is the case with many reduced tax rates, abatements and exemptions, cities and states can ultimately end up with a negative fiscal impact.^[10] Projected growth does not always occur even when new firms are established in the targeted areas, leaving areas without the projected increase in tax revenues. Since transportation costs have increasingly become reduced, it has become much easier for businesses to move their location.^[11] This means that firms can establish themselves within targeted zones, enjoying reduced tax rates and exemptions, and move when the rates return to normal.

A 2011 paper by the National Bureau of Economic Research found that there was a correlation between business incentives and corruption: An increase of federal corruption crimes by 1 per 100,000 residents was associated with a 2.9% greater chance that a community offers any form of business incentives. Furthermore, an increase in the rate at which government officials are convicted of federal corruption of 1 per 100,000 residents was associated with a 5.9% greater probability that a community will offer direct tax reductions rather than tax increment financing.^[12]

See also

• Ghetto- United States
• Economic Development
• Economic Growth
• Revenue Bonds
• Investment Promotion Agency
• Tax Increment Financing
• Tax Increment Reinvestment Zone
• Urban Decay
• Urban Enterprise Zone
• Urban Renewal

Notes

1. ↑ Bartik, Timothy J. 2005. "Solving the Problems of Economic Development Incentives." Growth and Change 36 (Spring):p.140.
2. ↑ Irene S. Rubin and Herbert J. Rubin "Economic Development Incentives: The Poor (Cities) Pay more" Urban Affairs Review September 1987 vol. 23 no. 1 p.38
3. ↑ Rubin & Rubin (1987), p. 46
4. ↑ "Site selection consultants". Retrieved 4 November 2011. 
5. ↑ Rubin & Rubin (1987), p. 56
6. ↑ Bartik, p. 28-30.
7. ↑ "Economic Development Incentives". Greyhill Advisors. Retrieved 30 September 2011. 
8. ↑ Rubin p.50
9. ↑ Alan Peters and Peter Fisher (2004). “The Failures of Economic Development Incentives.” Journal of the American Planning Association. 70(I, Winterp. 43.
10. ↑ Peters p.32
11. ↑ Bartik p.142
12. ↑ ""Who Offers Tax-Based Business Development Incentives?" at Journalist's Resource.org". 

References

External links

• Municipal Research and Service Center of Washington- Seattle based organization
• -ADP’s site to aid businesses in using local and state incentives
• Site of Charleston’s Coordinating Council for Economic Development
• Ohio Department of Development