Finance
What Makes Economic Development Incentives Successful?
How development incentives help businesses
The news often reports about states and cities offering millions of dollars in “incentives” to attract or retain businesses. Smaller businesses wonder how they can tap into that “free” money. Development incentives are tools used by governments to attract and retain businesses, but they are not free money handouts. The programs are often targeted or used to level the playing field.
What is a development incentive?
Development incentives are offerings by state and local governments that help attract new businesses or expand existing ones. Common incentives include:
| workforce development and training | sales tax rebates | cash |
| tax credits or breaks | infrastructure construction | subsidies |
While some governments may toss cash on the table to help spawn development, these are few and usually for less desirable sites.
Why are there economic development incentives?
“Economic development incentives are tools, not giveaways,” said Glenn Hamer, CEO of the Texas Association of Business. “Texas, like many states, has programs to help a business. Here, those tools are our secret sauce.”
Hammer said that in Texas, the businesses and the state government united behind the work of the Texas Economic Development Corporation and are “pretty remarkable.”
Coming out of the Great Recession, sometimes adjoining cities competed to bid up incentives to land the newest power center, manufacturing plant, or customer service center. States were doing the same thing. The hope was that the new construction, retail sales, and jobs would fill city coffers. The result was nonproductive.
Today, it’s more common for cities to cooperate with each other and partner with an incoming or expanding business.
“We try to find ways to partner with companies and developers that make sense for the city and the developer,” said Jaye O’Donnell, economic development director for Mesa, Arizona. “That often saves time and money or creates efficiencies.”
O’Donnell said it creates a winning combination for both the company and the city.
“In Arizona, cities talk,” said O’Donnell. “We have a very good relationship, and there are not a lot of things that one city can do that are vastly different from other cities.”
Hamer agrees, “In Texas, everyone works for the same purpose: helping a business. Besides, we don’t compete with other states; we compete on the global stage.”
Why development incentives are controversial
Not everyone agrees that public money should be handed to private companies. The most common accusation is that the government is picking winners and losers.
“(Development incentives) are not helping,” said John Mozena, president, Center for Economic Accountability. “In many ways, it’s probably hurting, and we should change that because right now we’re not only wasting a lot of money, but we’re also in many places creating some really serious public policy problems as a result.”
Mozena said that a state or local government often changes plans to accommodate a facility. His concern focuses on projects paid by public dollars that never provide the promised return on investment.
In 2017, Wisconsin, Chinese technology giant Foxconn proposed a $10 billion manufacturing facility to create over 13,000 jobs and billions in state and local revenues. The state acquired land through eminent domain, paying willing and unwilling families to give up farms, homes and property to accommodate the massive plant.
The state promised Foxconn $2.9 billion in tax credits, reduced property taxes, infrastructure construction, and cash, resulting in a 29 percent investment for the project. By 2024, Foxconn had not delivered nearly all its promises, and only a small manufacturing cluster had been created. The state renegotiated the incentives to $80 million, 12 percent, contingent on creating almost 1,500 jobs and merely $676 million in investment by 2026.
“Foxconn never came through,” he said. “Sometimes the incentives never match the numbers.”
He cited the Emerson Electronics plant near St. Louis, which was given so many tax abatements that it cost the city money to have the plant operating. This led to serious financial problems for Ferguson, Missouri.
On the other hand, cities can point to great successes—even when there are blips along the way. This works when the city plans for development in the places it wants.
“Years ago, we had a company looking to build a 1.3-million-square-foot facility. The city moved up its improvement plans into the area because we planned to have industry there,” said O’Donnell. “We put in the infrastructure, which was around $10 million, and we wound up getting a 1.3 million square foot building for the project.”
The infrastructure, however, served more than just one facility. Mesa found new job-generating companies moving into the area because it was now served with city services, power and fiber.
The first tenant, a solar manufacturer, failed. Then an Apple contractor moved in to make glass for mobile phones and tablets. It also failed. Shortly after that, Apple, moved in its Global Command Center, a big win for Mesa.
More recently, the city of Phoenix approved a $200 million infrastructure and workforce investment to land TSMC, a Taiwan-based semiconductor manufacturing company. It is building a $65 billion facility that is readying to open its first phase, and the second and third phases are underway.
How to tap into development incentives
When considering relocating to a new geographic area or expanding locally, meeting with business organizations like the Texas Association of Business or chambers of commerce is a good way to arrange introductions. The next stop is the state or local government’s economic development office.
“When we’re contacted, we introduce the business to the state EDC,” Hamer said. “In Texas, the governor’s office takes the lead in helping companies move in or grow.”
Companies fare best when putting all their cards on the table and partnering with government agencies. Agencies are cautious on how incentives are doled out. Some have learned that there’s no guarantee the company will stay put.
In 2014, New Mexico spent almost $25 million upgrading an airport, supporting hiring, and helping start up a drone manufacturing facility. Within a year, Titan Aerospace was acquired by Alphabet and then relocated to California. Ever since, New Mexico has been trying to “claw back” and recover its largess.
“These (abatements and credits) add up overtime to really put constraints on government budgets,” he said. “That means these abilities to provide basic municipal services are at risk.”
What kinds of incentives to expect
Government agencies have a full menu of incentive options. Just don’t expect an open checkbook to land your business.
“Deals don’t happen like Foxconn,” said O’Donnell. “When we work with a company, providing (cash) assistance is rare. If a company needs the cash to make the deal work, we don’t think it has a successful business model.”
Hamer stresses that the most critical development incentive is a trained workforce.
“We have a Texas WORKS state program to help companies with workforce development,” he said. “Having a well-trained workforce is our biggest selling point.”
Texas isn’t alone. Arizona has Arizona@Work, Nevada has Nevada Works and other states also have federally-funded workforce programs. Many states offer tax abatements, research and development credits, and even sales tax rebates for capital purchases.
Many jurisdictions will upgrade infrastructure, build roads, and extend services to accommodate a facility. Others provide concierge services to shepherd a company through the permitting and approval process smoothly.
Governments will learn what a company needs to succeed and generally work to deliver that help. If cash is put on the table, Hamer and O’Donnell say it’s simply to level the playing field against a competing state or nation.
Mozena is not impressed though.
“Research shows that (development incentives) matter at most a quarter of the time,” he said. “That means 75 percent of the time, companies are just doing what they would have done anyway.”
