Dec 3, 2012
Bill McMeekin
Bill McMeekin
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Incentives: Economic Tool or Empty Calorie?

A new analysis shows most of the top counties for total personal income growth are in the South and Southwest

The New York Times series, The United States of Subsidies, is sure to stir much debate in economic development circles.

And after all of the debate on the value, wisdom, effectiveness, necessity and oversight of publicly funded incentives to private enterprise, very little is likely to change. Government use incentives because they feel they have to or because they want to.

The opening of the Times series, which began Sunday, provides an exhaustive analysis of more than 150,000 government-back subsidies and interviews with 100 government leaders, business organizations, corporate executives and consultants. The article concludes that programs are often dysfunctional – the job creation results poorly tracked and even when they are, “it is impossible to know whether the jobs would have been created without the aid.”

And there are countless examples of significant public financed assistance given to companies on the promise of jobs and investment that were either never delivered or didn’t prevent the company from leaving town or closing.

Some locales are desperate to attract investment and jobs and have adopted a “do whatever it takes” approach to get them despite the downside risks that the jobs will not be delivered as promised or won’t disappear in a short span. Other locales use them to keep positive economic momentum going and believe if they don’t offer them, some other place will.

The irony is that many communities and states have felt the need to step up incentive programs at the same time the outcry against any increase in government spending has grown more shrill and the demands for incentives from potential corporate investors has grown more pronounced.

When Caterpillar went shopping for a location for a manufacturing plant it was relocating from Japan, it focused its attention on the Southeast, and North Carolina, South Carolina and Georgia were all in the running. Helping Georgia win the project and its 1,400 jobs, in no small measure, was $75 million in incentives from the state and a consortium of local governments and utilities.

For those government leaders, the calculus of incentives is worth the investment because of the projected  $2.4 billion impact, an additional 2,800 jobs created as production ramps up over the next five years, and new investment from suppliers and other employers that will locate nearby to support the new facility.

Texas has made no secret of its willingness to use incentives as a drawing card to land projects and jobs. The state spends – or in the parlance of government, invests – more than $19 billion each year. It refers to the Texas Enterprise Fund as the largest “deal-closing” fund of its kind in the nation, a tool used only where a single Texas site is competing with another viable out-of-state option. Texas incentives have produced Texas-size results. The state’s raw job creation record dwarfs those of any other state over the last five years.

Some states have adopted aggressive incentive programs to build on industry clusters. New Jersey, for one,  has awarded $1.7 billion in tax incentives for companies across a variety of industries to create and retain jobs in the state, The state raised its research and development tax credit program from 50 percent to 100 percent, in part to build on its foundation as a global center of biopharmaceuticals and life sciences. Wyoming has crafted tailored incentive programs designed to build on its nascent data center industry. Those incentives came into play when Microsoft decided to pick the state for a $112 million data center.

And localities have made perfectly rational decisions to use incentives to offset disadvantages that they might have in labor costs, business costs or skilled workforce availability.

Despite the ambiguity of results, the competition to attract what has become a shrinking pool of job creating projects will mean as long as one place is offering them, most places will feel like they have to as well. Even as federal lawmakers  thrust and parry over the yawning federal deficit, spending and taxes, it is doubtful that will result in any meaningful impact on the use of incentives by local and state governments, in part because of the impossibility of predicting the impact on job creation and investment.

The rancor surrounding the use of subsidies is akin to professional sports where the arguments over who is to blame for ever-escalating player salaries – the “greedy, entitled” athletes or the “idiot owners” who pay exorbitant contracts in the hopes of winning “now.” As the Times  article notes, the near term goals of policymakers for creating jobs and the long term goals of sound economic development and fiscal planning are often mutually exclusive.

How important are incentives in your economic development strategy and what has been your community’s approach in using them? Could you retain your existing companies and attract new investment without them? What would you change about the structure and use of incentives if you could? Weigh in with your thoughts.

 

 

 

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