Local Economic Development Incentives: Community Perspectives

1
Local Economic Development Incentives Community
Perspectives

• by
• Cynthia Rogers
• Associate Professor of Economics
• University of Oklahoma
• crogers_at_ou.edu
• Prepared for Norman Community Dialogue
• 5/16/2007

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Incentives gt Legalized Bribery?(Bartik 2005)

• Provide cash or near cash aid
• Offered to large businesses to expand or open new
  operations

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Incentive Types (Bartik 2005)

• Discretionary assistance-property tax abatements,
  state corporate income tax credits, low-interest
  financing, free land or buildings
• Customized services -site information, regulation
  negotiations, training, site-related public
  infrastructure
• Entitlements under state/local laws

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Justification for incentives?

• Conditions
• Influence business location decisions - firm is
  at the margin (Yinger 2007)
• Create positive net social benefit (Bartik 2005)

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Incentives gt Pro-business Signal

• Youve got to have incentives to get your foot
  in the door (Carlton, 1996)
• North Carolina has one of the strongest
  economies and one of the best business climates
  because of our aggressive efforts to create and
  keep good jobs --Governor Jim Hunt, (Lyne, 1998)

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Business Climate gt Firm Location

• It is increasingly difficult to argue that
  business climate, however broadly defined, does
  not influence interregional firm location.
• Mike Wasylenko (1991)
• Professor of Economics, Senior Assoc. Dean for
• Academic Affairs Administration
• Maxwell School, Syracuse University

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Potential Benefits of Incentives

• Community
• Direct impacts on community welfare
• Business climate signal (future gains)
• Decision makers
• Political clout with constituents
• Clout with subsidized firm
• Private interests

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Problem with Incentives

• Not all firms are at the margin
• Benefits depend on local conditions and increase
  with ability to (Bartik 2005)
• employ locals (un(der)employment)
• move residents up the occupation ladder (higher
  wage jobs)
• better utilize local infrastructure
• Costs gt benefits
• Ignorance
• Prisoners Dilemma

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Cost gt Benefit Ignorance(Bartik 2005)

• Growth good
• Who gains? Locals vs. new folks
• Wage gains? Employment gains?
• Private gains at public cost
• Incentives increase property and asset values
• Costs are spread to general public

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Cost gt Benefit Prisoners Dilemma

• Everyone wants to offer incentives
• Competition escalates value of offers and
  diminishes net benefit
• You cant say no,
• but you cant afford to say yes.
• (Stephen Goldsmith, Mayor of Indianapolis,
  Schwartz et al., 1992)

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Economic Development Game(Ellis Rogers 2000)

• Identical localities compete for a firm
• Only rational deals are offered
• Firm is at the margin
• Expect positive social benefit
• Perfect planning world
• Precise cost-benefit analysis
• Full disclosure and public accountability
• Failing to win the firm sends negative signal
  about business climate which increases with
  difference from high bid

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Upshot of Game

• Localities bid the entire value of attracting the
  firm to have a chance at winning
• All localities would do better if none offered
  subsidies
• If none offered subsidies, each would want to
  offer a small subsidy
• If one locality offers subsidies, all end up
  bidding high race to the bottom

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Restraint Policies Just Say NO?

• Just say NO!
• Wont work on voluntary basis
• Top down (federal solution) not likely
• States could limit intra-state competition
• Decrease overall business taxes (with no
  incentives)
• Works if taxes arent fully capitalized in
  property values (Yinger 2007)
• Could be detrimental if local public expenditures
  are cut to fund (Mofidi Stone 1990)
• Literature finds very small impacts at best

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Restraint Policies 2Competition

• Foster unique local assets to increase value to
  businesses (economic rents)
• Examples (Soji 2007, Bartik 2005)
• Clusters of industries with competitive
  advantages
• Talent/expertise - Creative class
• Natural amenities - gas, wind, solar
• Institutions universities, research centers
• Transportation and highway access
• Image reputation business climate
• Regional civic and leisure assets
• Effectiveness and support?

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Restraint/Refinement Policies(Bartik 2005)

• Decrease marginal taxes on new business
• Set qualifications to match social benefit
• Puts screen on worth of projects and eliminates
  political distortions
• Discretionary incentives with cap
• Cap overall number or amount
• Document criteria
• impact on location decision
• cost-benefit analysis

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Refinement Policies(Bartik 2005)

• Require better costs-benefit analysis
• Employment wage benefits
• Share of new jobs to locals and unemployed
• Fiscal impacts expenditure and revenue
• Establish project standards
• Minimum standards on job quality
• Local hiring requirements
• Clarifies aspects of cost-benefit analysis
• Transparency-full public disclosure
• National database of offers
• Improve information and debate

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Refinement Be Up-front(Bartik 2005)

• More Up-Front Incentives
• More boom for the buck- firms are SR
• Cant shift costs to future
• Clawback provisions
• Legally-binding requirements to recover portion
  of up-front investment
• Oversight of performance and goals
• Relate to goals long term community benefit
• More In-kind services
• Customized training, access roads, other
  infrastructure
• More general benefit to public
• Automatic clawback

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Implications Restraint Refinement (Ellis
Rogers 2000)

• Restraint is warranted
• Offering incentives can be beneficial
• Incentives competition decreases value of
  offering incentives
• Competition is inevitable
• Refinement of practice is needed
• Work against ignorance
• Focus on local conditions and goals

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Use with Extreme Caution Incentives may cause
injury to self or others!
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Works Cited

• Bartik, T. Solving the Problems of Economic
  Development Incentives, Growth and Change 36(2
  (2005, 139-166.
• Carlton, G. "A Conversation with Gary Carlton."
  (1996) available http//kswww.harvard.edu/battle/
  ncbattle/rntble/trcarlt.htm 12/11/98.
• Ellis, S. and C. Rogers. Local Economic
  Development as a Prisoners' Dilemma The Role of
  Business Climate, Review of Regional Studies
  30(3) (2000), 315-330.
• Lyne, J. "The Governors Speak How the Top 10 Did
  It." Site Selection, (February/March 1998),
  48-49.
• Mofidi, Alaeddin and Stone, Joe A. "Do State and
  Local Taxes Affect Economic Growth?" The Review
  of Economics and Statistics, Vol. 72, No. 4
  (1990, November) 686-691.
• Schwartz, J., and T. Barret, with F. Washington,
  B. Fisher, and L. Rodado. "Can You Top This?"
  Newsweek (February 17, 1992), 40-41.
• Soji, A. Making Strategic Growth Happen
  Principles, Strategies and Examples, 2007
  Michigan Land Use Summary, Implementing
  Prosperity February 19, 2007, Kellogg Center,
  East Lansing, MI
• Wasylenko, M., "Empirical Evidence on
  Interregional Business Location Decisions and the
  Role of Fiscal Incentives in Economic
  Development." In Industry Location and Public
  Policy, Knoxville, TN University of Tennessee
  Press, 1991.
• Yinger, J. State and Local Public Finance
  Lecture 16 Economic Development Policy Maxwell
  School, Syracuse University (2007).
  http//faculty.maxwell.syr.edu/jyinger/Classes/PPA
  735/MainPage/PPA735_07.htm 5/1/20070.