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How Some Locations are Making Their Business Case for Incentives

Incentives are only part of an area’s economic development strategy and they are a necessity for companies that are struggling to compete in challenging economic times. See how Columbus, Ohio, Alabama and New York city have all recently successfully used incentives to promote economic growth.

David J. Robinson, The Montrose Group, LLC (Q1 / Winter 2013)
State and local incentives helped secure the $600 million Airbus SAS final assembly plant in Mobile.(Shown here: Airbus Chief Executive Fabrice Bregier and Alabama Gov. Robert Bentley)
State and local incentives helped secure the $600 million Airbus SAS final assembly plant in Mobile.(Shown here: Airbus Chief Executive Fabrice Bregier and Alabama Gov. Robert Bentley)
Eighty billion dollars — that is the amount local and state governments spent in a year on economic development incentives, according to recent reports. These incentives are public subsidies used to create wealth through retaining and attracting companies and jobs. In challenging fiscal times, some are asking whether an $80 billion public subsidy for business is justified. The answer is yes — economic development incentives are part of a successful strategy to retain and attract companies in the United States, constitute only a small portion of the U.S. economy and local and state budgets, and — most importantly — can be both a successful offensive and defensive approach to address cost-of-doing-business issues and reshape and diversify regional and state economies.

Economic development incentives are part of — not the whole — regional and state jobs strategy. Company retention and attraction campaigns identify optimal sites that are zoned and ready for development with infrastructure in place in a region with an available work force and good quality housing, healthcare, and other amenities. More sophisticated communities will work to address cost-of-doing-business issues and determine which of their own growing industries should become a public priority to further diversify their economies. Winning local and state economic strategies involve more work than throwing tax breaks at a company.

A Policy Reward
Owner and employee financial benefits need to be aligned with company goals. It’s a fundamental management principal. Without that alignment, profits are unlikely to follow. Companies will use salaries, bonuses, stock options, and other financial incentives based on the employees’ and company’s performance to reward worker performance. The same is true in public policy formation. Government rewards positive behavior and punishes negative. Economic development incentives are just one area of public policy where government rewards positive behavior, i.e., the creation of jobs and capital investment. Just as stock options create an incentive for a company’s employees to care about the performance of their employer, economic development incentives create a major incentive for private companies to grow in a region or state. The vast majority of economic development incentives are performance-based. In essence, a company only receives the tax credit, tax abatement, grant or loan if it meets the jobs and capital investment numbers promised. Many tax credits are also created to support priority industries. As an example, states that target manufacturers may offer a sales tax credit for the purchase of manufacturing machinery.

A Drop in the Bucket
America’s top policy priority is to improve the performance of the U.S. economy. While economic development incentives are only a small portion of the strategy needed to improve the American economy, these public subsidies have the policy advantage of being an investment in companies looking to grow jobs and make capital investments.

The question is not just how to do this but how much government money can be devoted to solving this challenge. $80 billion may sound like a lot of money, but it is a drop in the bucket of the $15.8 trillion U.S. economy. More importantly, it is estimated by the Government Accountability Office that $2 trillion is spent by local and state governments, so $80 billion to retain and attract new jobs looks like a small number when compared to total local and state government spending in a nearly $16 trillion dollar economy. This number looks even smaller when compared to government funding for stimulus programs, bank rescues, and other efforts to restart the economy.

Finally, $80 billion may be in fact too small of an investment considering the global economic threats on the horizon. The United States has the largest economy in the world — constituting more than 20 percent of the world’s GDP. However, a recent Organization of Economic Co-Operation and Development study estimated that by 2030, the Chinese economy will represent well over 20 percent of global GDP and will be larger than the U.S. economy. In a nation with the highest corporate tax rate among the industrialized world, and labor wage rates far above China and other emerging economies, economic development incentives are a fact of life if regions, states, and the United States want to compete in a global economy. Good Defense and Better Offense The investment by local and state governments in economic development incentives also is supported by the fact they produce private-sector jobs and capital investment if done correctly. In sports parlance, economic development incentives offer both a good defense to the high cost of doing business and a strong offensive strategy for transforming a region or state from a loser into a winner. Incentives are also a 50-state game. For example, the decline of the industrial Midwest created an opportunity for the Southern States to create a manufacturing industry from scratch. Additionally, the urban challenges of cities have forced the aggressive use of economic development incentives to entice businesses and residents to stay. Thus, all parts of the nation have a reason to focus on creating companies and jobs through a proactive economic development strategy.

Midwest Addresses Cost of Doing Business
Without economic development incentives, the Midwest would have little chance of competing against the South — not to mention Europe or Asia. The Midwest has been battling the South and global markets to keep its high-wage manufacturing jobs for decades. Labor costs are often the prime driver in a corporate site location project. According to the U.S. Department of Labor, Midwest labor costs are over $2 more an hour than those in the South, and more than double the wages in Brazil, triple the wages in Taiwan, and four times the wages in Mexico.

The traditional industrial states also struggle with other high costs of doing business. The biggest industrial states — Ohio, Michigan, Pennsylvania, Indiana, Illinois, Minnesota, and Wisconsin — are not among the top 10 states in the State Business Tax Climate index (created by the Tax Foundation), in the Workers’ Compensation Premium Rates comparison (except Indiana), or in national electric rate comparisons. Thus, the Midwest and other traditional industrial states use economic development incentives to both play defense and retain existing manufacturers and to lure 21st century high-tech projects as well.

Two recent examples in the Columbus, Ohio, area are worthy of note. The state of Ohio used its billion-dollar-plus, voter-approved, technology-based economic development program known as the Third Frontier to make a $5 million grant to Honda for redevelopment of the automaker’s major research facility. The Honda manufacturing facilities located just northwest of Columbus not only provide thousands of direct high-wage jobs, but have also lured more than 200 Honda suppliers to the central Ohio marketplace. In addition, Columbus recently enjoyed the announcement of a major “Big Data” project involving at least 500 high-wage jobs from IBM. The City of Columbus granted a 65 percent income tax credit as well as an annual cash payment that will cost Columbus an estimated $5.9 million over six years. Add in a state of Ohio Job Creation Tax Credit of 60 percent over eight years, and the incentives are just too big for corporations to ignore. When Columbus is competing against states that do not have a municipal income tax, aggressive local economic development incentives are a must to win major projects.

Next: Reshaping the South
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