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Local Economic Local Economic Development Incentives: Development Incentives: Community PerspectivesCommunity Perspectives

byby

Cynthia RogersCynthia Rogers

Associate Professor of Economics Associate Professor of Economics

University of OklahomaUniversity of Oklahoma

crogers@ou.educrogers@ou.edu

Prepared for Norman Community DialoguePrepared for Norman Community Dialogue

5/16/20075/16/2007

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Incentives => Legalized Bribery?Incentives => Legalized Bribery?(Bartik 2005)(Bartik 2005)

Provide cash or near cash aid Provide cash or near cash aid Offered to large businesses to Offered to large businesses to

expand or open new operationsexpand or open new operations

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Incentive Types Incentive Types (Bartik 2005)(Bartik 2005)

Discretionary assistanceDiscretionary assistance-property tax -property tax abatements, state corporate income tax credits, abatements, state corporate income tax credits, low-interest financing, free land or buildingslow-interest financing, free land or buildings

Customized servicesCustomized services -site information, regulation -site information, regulation negotiations, training, site-related public negotiations, training, site-related public infrastructureinfrastructure

EntitlementsEntitlements under state/local laws under state/local laws

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Justification for incentives?Justification for incentives?

Conditions:Conditions:1.1. Influence business Influence business

location decisions - location decisions - firm is “at the firm is “at the margin” margin” (Yinger 2007)(Yinger 2007)

2.2. Create positive net Create positive net social benefit social benefit (Bartik (Bartik 2005)2005)

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Incentives => Pro-business SignalIncentives => Pro-business Signal

““You’ve got to have incentives to get You’ve got to have incentives to get your foot in the door” your foot in the door” (Carlton, 1996)(Carlton, 1996)

““North Carolina has one of the strongest North Carolina has one of the strongest economies and one of the best business economies and one of the best business climates because of … our aggressive climates because of … our aggressive efforts to create and keep good jobs” --efforts to create and keep good jobs” --Governor Jim Hunt, Governor Jim Hunt, (Lyne, 1998)(Lyne, 1998)

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Business Climate => Firm Location Business Climate => Firm Location

““It is increasingly difficult to It is increasingly difficult to argue that business climate, argue that business climate,

however broadly defined, does however broadly defined, does not influence interregional firm not influence interregional firm

location.”location.” Mike Wasylenko (1991)Mike Wasylenko (1991)

Professor of Economics, Senior Assoc. Dean for Professor of Economics, Senior Assoc. Dean for Academic Affairs & Administration Academic Affairs & Administration Maxwell School, Syracuse UniversityMaxwell School, Syracuse University

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CommunityCommunity• Direct impacts on community welfareDirect impacts on community welfare• Business climate signal (future gains)Business climate signal (future gains)

Decision makers Decision makers • Political clout with constituentsPolitical clout with constituents• Clout with subsidized firmClout with subsidized firm

Private interestsPrivate interests

Potential Benefits of IncentivesPotential Benefits of Incentives

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Problem with IncentivesProblem with Incentives

1.1. Not all firms are “at the margin”Not all firms are “at the margin”2.2. Benefits depend on local conditions Benefits depend on local conditions

and increase with ability to and increase with ability to (Bartik 2005)(Bartik 2005)

• employ locals (un(der)employment)employ locals (un(der)employment)• move residents up the occupation ladder move residents up the occupation ladder

(higher wage jobs)(higher wage jobs)• better utilize local infrastructure better utilize local infrastructure

3.3. Costs > benefitsCosts > benefits• Ignorance Ignorance • Prisoners’ DilemmaPrisoners’ Dilemma

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Cost > Benefit: IgnoranceCost > Benefit: Ignorance(Bartik 2005)(Bartik 2005)

Growth = goodGrowth = good• Who gains? Locals vs. new folksWho gains? Locals vs. new folks• Wage gains? Employment gains?Wage gains? Employment gains?

Private gains at public costPrivate gains at public cost• Incentives increase property and Incentives increase property and

asset valuesasset values• Costs are spread to general publicCosts are spread to general public

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Cost > Benefit: Prisoners’ DilemmaCost > Benefit: Prisoners’ Dilemma

Everyone wants to offer incentives Everyone wants to offer incentives Competition escalates value of offers Competition escalates value of offers

and diminishes net benefitand diminishes net benefit

““You can’t say no, You can’t say no,

but you can’t afford to say yes.” but you can’t afford to say yes.” (Stephen Goldsmith, Mayor of Indianapolis, Schwartz et al., (Stephen Goldsmith, Mayor of Indianapolis, Schwartz et al.,

1992)1992)

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Economic Development GameEconomic Development Game(Ellis & Rogers 2000)(Ellis & Rogers 2000)

Identical localities compete for a firmIdentical localities compete for a firm Only rational deals are offered Only rational deals are offered

• Firm is “at the margin”Firm is “at the margin”• Expect positive social benefitExpect positive social benefit

Perfect planning worldPerfect planning world• Precise cost-benefit analysis Precise cost-benefit analysis • Full disclosure and public accountabilityFull disclosure and public accountability

Failing to win the firm sends negative Failing to win the firm sends negative signal about business climate which signal about business climate which increases with difference from high bidincreases with difference from high bid

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Upshot of GameUpshot of Game

Localities bid the entire value of Localities bid the entire value of attracting the firm to have a chance at attracting the firm to have a chance at winningwinning

All localities would do better if none All localities would do better if none offered subsidiesoffered subsidies

If none offered subsidies, each would If none offered subsidies, each would want to offer a small subsidywant to offer a small subsidy

If one locality offers subsidies, all end up If one locality offers subsidies, all end up bidding high – “race to the bottom”bidding high – “race to the bottom”

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Restraint Policies: Just Say NO?Restraint Policies: Just Say NO?

Just say NO!Just say NO! • Won’t work on voluntary basisWon’t work on voluntary basis• Top down (federal solution) not likelyTop down (federal solution) not likely• States could limit intra-state competitionStates could limit intra-state competition

Decrease overall business taxes (with no Decrease overall business taxes (with no incentives) incentives) • Works if taxes aren’t fully capitalized in Works if taxes aren’t fully capitalized in

property values property values (Yinger 2007)(Yinger 2007)• Could be detrimental if local public Could be detrimental if local public

expenditures are cut to fund expenditures are cut to fund (Mofidi & Stone 1990)(Mofidi & Stone 1990)

• Literature finds very small impacts at best Literature finds very small impacts at best

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Restraint Policies: 2=CompetitionRestraint Policies: 2=Competition

Foster unique local assets to increase value Foster unique local assets to increase value to businesses (economic rents)to businesses (economic rents)

Examples Examples (Soji 2007, Bartik 2005)(Soji 2007, Bartik 2005) • Clusters of industries with competitive Clusters of industries with competitive

advantages advantages • Talent/expertise - “Creative class”Talent/expertise - “Creative class”• Natural amenities - gas, wind, solarNatural amenities - gas, wind, solar• Institutions: universities, research centersInstitutions: universities, research centers• Transportation and highway access Transportation and highway access • Image & reputation – business climateImage & reputation – business climate• Regional civic and leisure assets Regional civic and leisure assets

Effectiveness and support?Effectiveness and support?

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Restraint/Refinement PoliciesRestraint/Refinement Policies(Bartik 2005)(Bartik 2005)

Decrease marginal taxes on Decrease marginal taxes on newnew business business• Set qualifications to match social benefitSet qualifications to match social benefit• Puts screen on worth of projects and eliminates Puts screen on worth of projects and eliminates

political distortionspolitical distortions Discretionary incentives with capDiscretionary incentives with cap

• Cap overall number or amountCap overall number or amount• Document criteriaDocument criteria

impact on location decisionimpact on location decision cost-benefit analysiscost-benefit analysis

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Refinement PoliciesRefinement Policies(Bartik 2005)(Bartik 2005)

Require better costs-benefit analysisRequire better costs-benefit analysis• Employment & wage benefitsEmployment & wage benefits• Share of new jobs to locals and unemployedShare of new jobs to locals and unemployed• Fiscal impacts: expenditure and revenueFiscal impacts: expenditure and revenue

Establish project standardsEstablish project standards• Minimum standards on job qualityMinimum standards on job quality• Local hiring requirementsLocal hiring requirements• Clarifies aspects of cost-benefit analysisClarifies aspects of cost-benefit analysis

Transparency-full public disclosureTransparency-full public disclosure• National database of offersNational database of offers• Improve information and debateImprove information and debate

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Refinement: Be Up-frontRefinement: Be Up-front(Bartik 2005)(Bartik 2005)

More Up-Front IncentivesMore Up-Front Incentives• More boom for the buck- firms are SRMore boom for the buck- firms are SR• Can’t shift costs to future Can’t shift costs to future

Clawback provisionsClawback provisions• Legally-binding requirements to recover portion of Legally-binding requirements to recover portion of

up-front investmentup-front investment• Oversight of performance and goalsOversight of performance and goals• Relate to goals & long term community benefitRelate to goals & long term community benefit

More In-kind servicesMore In-kind services• Customized training, access roads, other Customized training, access roads, other

infrastructureinfrastructure• More general benefit to publicMore general benefit to public• Automatic clawbackAutomatic clawback

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Implications: Implications: Restraint + Refinement Restraint + Refinement

(Ellis & Rogers 2000)(Ellis & Rogers 2000)

Restraint is warrantedRestraint is warranted Offering incentives can be beneficialOffering incentives can be beneficial Incentives competition decreases value Incentives competition decreases value

of offering incentivesof offering incentives Competition is inevitableCompetition is inevitable

Refinement of practice is neededRefinement of practice is needed Work against ignoranceWork against ignorance Focus on local conditions and goals Focus on local conditions and goals

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Use with Extreme Caution: Use with Extreme Caution: Incentives may cause injury to self Incentives may cause injury to self

or others!or others!

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Works CitedWorks Cited

Bartik, T. “Solving the Problems of Economic Development Incentives,” Bartik, T. “Solving the Problems of Economic Development Incentives,” Growth and Growth and ChangeChange 36(2 (2005,: 139-166. 36(2 (2005,: 139-166.

Carlton, G. "A Conversation with Gary Carlton." (1996) available: Carlton, G. "A Conversation with Gary Carlton." (1996) available: http://kswww.harvard.edu/battle/ncbattle/rntble/trcarlt.htm [12/11/98].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 Ellis, S. and C. Rogers. “Local Economic Development as a Prisoners' Dilemma: The Role of Business Climate,” of Business Climate,” Review of Regional StudiesReview of Regional Studies 30(3) (2000), 315-330. 30(3) (2000), 315-330.

Lyne, J. "The Governors Speak: How the Top 10 Did It." Lyne, J. "The Governors Speak: How the Top 10 Did It." Site Selection,Site Selection, (February/March (February/March 1998), 48-49. 1998), 48-49.

Mofidi, Alaeddin and Stone, Joe A. "Do State and Local Taxes Affect Economic Growth?" Mofidi, Alaeddin and Stone, Joe A. "Do State and Local Taxes Affect Economic Growth?" The Review of Economics and StatisticsThe Review of Economics and Statistics, Vol. 72, No. 4 (1990, November): 686-691., Vol. 72, No. 4 (1990, November): 686-691.

Schwartz, J., and T. Barret, with F. Washington, B. Fisher, and L. Rodado. "Can You Top Schwartz, J., and T. Barret, with F. Washington, B. Fisher, and L. Rodado. "Can You Top This?" This?" NewsweekNewsweek (February 17, 1992), 40-41. (February 17, 1992), 40-41.

Soji, A. “Making Strategic Growth Happen: Principles, Strategies and Examples,” 2007 Soji, A. “Making Strategic Growth Happen: Principles, Strategies and Examples,” 2007 Michigan Land Use Summary, “Implementing Prosperity” February 19, 2007, Kellogg Michigan Land Use Summary, “Implementing Prosperity” February 19, 2007, Kellogg Center, East Lansing, MICenter, East Lansing, MI

Wasylenko, M., "Empirical Evidence on Interregional Business Location Decisions and the Wasylenko, M., "Empirical Evidence on Interregional Business Location Decisions and the Role of Fiscal Incentives in Economic Development." In Role of Fiscal Incentives in Economic Development." In Industry Location and Public Industry Location and Public PolicyPolicy, Knoxville, TN: University of Tennessee Press, 1991., Knoxville, TN: University of Tennessee Press, 1991.

Yinger, J. Yinger, J. State and Local Public Finance Lecture 16: Economic Development PolicyState and Local Public Finance Lecture 16: Economic Development Policy Maxwell School, Syracuse University (2007). Maxwell School, Syracuse University (2007). http://faculty.maxwell.syr.edu/jyinger/Classes/PPA735/MainPage/PPA735_07.htmhttp://faculty.maxwell.syr.edu/jyinger/Classes/PPA735/MainPage/PPA735_07.htm [5/1/20070[5/1/20070..