Local Economic Development Incentives: Community Perspectives

1. Local Economic Development Incentives: Community Perspectives by Cynthia Rogers Associate Professor of Economics University of Oklahoma crogers@ou.edu Prepared for Norman Community Dialogue 5/16/2007

2. Incentives => Legalized Bribery?(Bartik 2005) • Provide cash or near cash aid • Offered to large businesses to expand or open new operations

3. 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

4. Justification for incentives? Conditions: • Influence business location decisions - firm is “at the margin” (Yinger 2007) • Create positive net social benefit (Bartik 2005)

5. Incentives => Pro-business Signal • “You’ve 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)

6. “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 Business Climate => Firm Location

7. 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

8. 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 > benefits Ignorance Prisoners’ Dilemma Problem with Incentives

9. 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 Cost > Benefit: Ignorance(Bartik 2005)

10. Cost > Benefit: Prisoners’ Dilemma • Everyone wants to offer incentives • Competition escalates value of offers and diminishes net benefit “You can’t say no, but you can’t afford to say yes.” (Stephen Goldsmith, Mayor of Indianapolis, Schwartz et al., 1992)

11. 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

12. 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”

13. Restraint Policies: Just Say NO? • Just say NO! • Won’t 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 aren’t 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

14. Restraint Policies: 2=Competition • 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?

15. 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

16. 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

17. Refinement: Be Up-front(Bartik 2005) • More Up-Front Incentives • More boom for the buck- firms are SR • Can’t 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

18. 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

19. Use with Extreme Caution: Incentives may cause injury to self or others!

20. 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/PPA735/MainPage/PPA735_07.htm [5/1/20070.