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INCENTIVES
From Site Selection magazine, November 2019
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Mumblings of Reform

Is the end of the economic development incentive war at hand?

INCENTIVES
Statue photos: Getty Images
by NATHAN JENSEN

The economic development frenzy — from a $22 billion tax incentive from the Dallas metro area for Amazon’s HQ2 to the crowning of the Foxconn investment in Wisconsin as the eighth wonder of the world — could give the impression that the use of economic development incentives is alive and well. Yet the HQ2 process has led to soul-searching by some communities, and Foxconn has turned out to be more of an embarrassment than a wonder. Numerous scandals, including news about program abuses that caused New Jersey Gov. Phil Murphy to veto the extension of the state’s tax credit program, have plagued major economic development programs.

To academics and insiders, the misuse of economic development programs, and incentives in particular, is an open secret. While some cities and states use these programs judiciously, others are seen as following the maxim of “shoot anything that flies; claim anything that falls.”

Even worse, evaluations of places such as New Jersey show that economic development officials knew that companies weren’t living up to promises, and that incentives weren’t necessary to attract an investment.

These situations may have brought us to a tipping point, where both the right and left are screaming for reform. But what are these reforms? And will they change anything?

Can Governments Reform Themselves?

Austin, Texas, is a good example of a city successfully pivoting from traditional incentives. Cited as the most transparent city in use of economic development incentives by watchdog organization Good Jobs First, Austin undertook a long process of stakeholder engagement to shift its incentive programs from big game hunting to a focus on small business. And Austin’s Travis County has decided to pause the use of any new tax abatements for economic development.

Other communities have also explored reforms. Cities from Houston to Nashville have shifted their approach, and the Brookings Institution worked with four cities — Cincinnati, Indianapolis, Salt Lake City and San Diego — to help their leaders better understand and analyze their economic development efforts.

But these self-reforms are not only rare, they are often enacted by cities and states that are already well governed and with the least need for investment. Cities and states desperate for investment, and with poor traditions of economic development transparency, are less likely to self-reform.

This may sound counter-intuitive. Why would poor locations, desperate for both tax revenues and effective economic development tools, turn to expensive and problematic programs? As I demonstrate in my book with Edmund Malesky, “Incentives to Pander,” one reason for the overuse of incentives is it allows politicians to take credit for investment that is coming into their district.

In booming cities like Austin, government officials aren’t pressured to “show deals” in order to win elections. But for the rest of the country, the political benefits of incentives are unchanged.

Can States Agree to Not Compete?

The Kansas City area has been the prime example of poor use of economic development policy. Kansas City was featured in a major New York Times exposé on economic development, and even had the unfortunate distinction of being the subject of a segment on John Oliver’s “Last Week Tonight.” As documented in these pages two years ago, companies in the Kansas City metro move a few miles west and claims to be “new” investment in Kansas. Others move a few miles east, and are new companies creating jobs in Missouri. As a result — and to the shock of many — Kansas Gov. Laura Kelly (a Democrat) and Missouri Gov. Mike Parson (a Republican), after their predecessors’ attempts fell short, this year signed a pact limiting the use of state incentives for these cross-border moves.

Statue

Similar treaties, specifically state compacts, could reduce the most egregious forms of job piracy. As noted by Sarah Holder in CityLab, in the wake of New York’s HQ2 debacle have come calls for reform of state incentives, as well as proposals for state compacts. A few states — including Arizona, Illinois, New York and West Virginia — have created draft compact legislation.

Compliance with these compacts could be simple. Many incentive programs ban the use of incentives for within-state relocations. With a stroke of the pen, these states could ban the use of incentives for interstate relocation. Political will is required to make these changes.

But the major limitation of these compacts is that they narrowly focus on only the worst cases of economic development abuse based on company relocation. What about incentives for new investments or company expansions that would have occurred without incentives? Are there ways that clever consultants can work around these regulations? And if a state breaks the compact, what happens?

These are all open questions. The symbolism of these reforms is truly amazing. This is an open admission that many of these practices, and in some cases programs, are deeply flawed and require such reform.

Voices from Below

Government officials have been calling for economic development reforms. But other voices are now being heard. In Columbus, Ohio, teachers marched in protest of tax abatements. Educators and teachers unions are potential allies in these reforms. So are some corporate leaders themselves, who for both practical and principled reasons don’t wish to dirty their hands with public money and the hoops they have to jump through to get it.

The media also has taken a more active role in scrutinizing incentives due to two developments. First, Amazon HQ2, which originally generated tremendous free press for the company, turned sour pretty quickly. Media outlets around the country began to investigate HQ2 and the deals that were being offered by communities. Second, a ruling by the Government Accounting Standards Board (GASB) now requires cities and school districts to report how much revenue is foregone by these abatements. The media has the interest and some of the data to examine the true costs of incentives.

Perhaps most surprising is that a group of well-intentioned site selection consultants are proposing reforms from the inside. Chris Steele of Conway (Site Selection’s parent company) has expressed worries about both transparency and perceived conflicts of interest. He has thus decided to pledge publicly that he will only ever take a fixed fee for service or time and expense payments for any site selection consulting services — including helping to negotiate incentives. Steele has invited other site location consultants to make this pledge.

Pick Your Battles?

These moves toward reform are welcome, but some realism is in order. One lesson from Amazon HQ2 was what cities of all stripes were willing to try to close this deal. They also were willing to do whatever necessary to keep their HQ2 bids secret — even after the competition was complete.

This is sobering, because reforms like state compacts can fall apart, possibly from a single defection. Major incentive reforms, such as the canceling of many film incentives, are very easily reversed. And for every ethical economic development consultant pushing for best practices there are many others that see extracting maximum incentives from communities as how they justify their existence to firms. Even the most well-meaning teachers unions and education reformers are fighting battles for our kids on so many fronts that we can’t expect incentives to be a top issue for them.

This is one of the major lessons of economic development programs. Public hearings for investment incentives or support for a sports stadium always include some good-natured reformers trying to make their voice heard. But on the other side is a whole army of lawyers, consultants and firms that directly benefit from these incentive programs.

Nathan Jensen

There is no easy solution to reforming economic development, but any solution must acknowledge that asking people to simply be better isn’t scalable or sustainable. Economic development reforms will most likely require some action by the federal government.


Nathan M Jensen is a professor of government at the University of Texas, Austin, a senior fellow at the Niskanen Center and the co-author (with Edmund J. Malesky) of “Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain.”



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