Don’t throw out the incentives with the bath water

By Mark Lautman

Published 7/25/10

 

Imagine Albuquerque without Verizon, Rio Rancho without Intel, or Clovis without the dairy industry. If we got rid of all the economic base employers that took economic development incentives to get them here, our economy would look like Detroit’s.

Most of the net new employment growth in our local economies has come from deals that required economic development incentives that were brokered by local economic development professionals.

There are many types of incentives on the books, and they are almost always accompanied by matching private sector contributions and concessions. We’re talking about training funds, gap financing, direct investment (cash), utility discounts, tax concessions and local infrastructure offsets, to name a few.

To the average taxpayer, the idea of throwing discretionary government resources we don’t have at private employers and giving up future tax revenue just sounds stupid. For two years, households and business owners have been cutting back their own discretionary spending. The gut reaction to making further cuts in public budgets or raising taxes in order to sweeten the deal for a big out-of-state employer is predictable.

But we need to be careful. All the moralizing and second-guessing going on about incentive deals that were made before the recession should be tempered with hindsight.

How far a community should go on an incentive package is ultimately a business judgment call. When you are running chronic surpluses, you can invest more and take more risk. In times like these, you have to be more conservative.

Let’s get something clear. Economic development incentives are not being abused, and have not been abused in the past. When public incentives are considered, projects are submitted to four tests.

Moral – Why should these guys get special treatment? Here, you want to make sure that the applicant is an economic base employer – one that sells 60 percent of its locally produced products or services to customers outside the local economy. They bring new money into the economy, which makes the economy bigger. The addition of economic base jobs to a community often has a multiplier effect on other local businesses, and raises tax receipts without raising tax rates.

Strategic – Is it strategically important to the community? Is it in an industry sector that the community considers strategic to its future? Of course, this presumes that the community has a strategy. When a community is strategically trying to build a new economic sector, then an applicant in that sector would have strategic value deserving of special treatment.

Tactical – Is the incentive needed to make the deal? Does it keep the community on the list? Is it a tie breaker? Does the incentive offset or mitigate a marginal weakness in the community’s competitive profile? If the employer doesn’t need the incentive and will most likely do the deal without it, don’t offer it.

Cost-benefit – If the candidate is an economic base employer in a strategic industry sector that needs it to make the numbers work or needs it to justify choosing your community over another, then there is only one thing left to think about. Is it a good business deal for the community? Can you afford it? Will the direct benefits exceed the direct costs?

Some of us have been petitioning for years for better data, metrics and accountability for economic development incentives, but setting up the data collection and analytics needed is complicated and expensive. Even when state and local governments had the money, there was little appetite for spending it on accountability efforts.

Political opportunists and traditional opponents of economic development incentives are using today’s austere budgets and political realities to criticize past deals, and the people who negotiated them, as irresponsible or worse.

Let’s see if those complaining about the lack of accountability are willing to budget the money to design, build and staff the system.

If the economy is still anemic in 2012, there will be even more pressure on state and local government leaders to create new jobs. In the hyper-competitive game of economic development, incentives are a fact of life. If you want to win – need to win – then you will need incentives, and good ones.

The last thing we want to do at the bottom of a recession and the beginning of a recovery is send our economic developers and community leaders into battle against competing communities with no bullets.

Read more: Don’t throw out the incentives with the bath water | New Mexico Business Weekly