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Editor’s Note: To Incent or Not to Incent?

Research indicates that incentives “tip” only 20 percent of location decisions, but it seems that’s a percentage that states and communities aren’t willing to relinquish.

Q1 2019
As we were putting our Q1 issue together, news broke that Amazon was cancelling its plans for a 25,000-employee HQ2 project in Long Island City, New York. Although the majority of New Yorkers were in favor of the project, there were those who saw the state’s offer of $3 billion in tax incentives — in spite of the $27 billion in tax revenue projected to be generated by the Amazon facility — as corporate welfare. They could also point to Foxconn’s broken promise of creating 13,000 manufacturing jobs in Wisconsin in exchange for $4.5 billion in tax incentives as an example of a corporate handout gone wrong.

In a recent report, Timothy Bartik, an economist with the Upjohn Institute for Employment Research in Kalamazoo, Michigan, looked at incentives nationally. He estimated that incentives “tip” only about 20 percent of all projects — the remaining 80 percent of projects would happen anyway, even without the incentives, he noted. Yet, because many locations use incentives to help lure businesses, all states and cities feel they must provide incentives in order to compete for a project’s promised jobs and tax revenue. Former Delaware Governor Jack Markell explained this dynamic in a New York Times op-ed piece. He noted that companies see the offer of incentives as evidence that a locality is committed to their company’s future.

Our recent annual Corporate Survey — the results of which are presented in this issue — confirms the importance of tax exemptions and other state and local incentives to businesses, with more than 80 percent of the respondents rating these factors as “very important” or “important.” But, as Markell said, “It would be better for taxpayers if these kinds of cash incentives could be invested instead in such things as schools and infrastructure.”

A recent article in Inc. tends to agree — especially when it comes to building up “innovation ecosystems.” Without investment in education and infrastructure, a location cannot support high-value industries no matter what incentives they offer, the article noted. Nonetheless, incentives will remain in the economic development toolbox and if properly targeted and evaluated — e.g., to firms that invest in R&D or skills training, said Bartik — they can hold value for a community as well as a company. So, the question remains, to incent or not to incent?

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