Business Incentive Initiative

This post was written by Ellen Harpel, founder of Smart Incentives and president of Business Development Advisors LLC (BDA), an economic development and market intelligence consulting firm. Post originally appeared on Smart Incentives blog.

tags_newyorkcity_newyork_1114708_o

Local businesses in New York City’s West Village. Source: Flickr user wallyg

City leaders have many concerns about the cost and effectiveness of economic development incentives in their communities, as we learned from the session on economic development financing tools during last year’s Congress of Cities. A new initiative working to develop best practices for evaluating incentives at the state level will help local elected officials whose communities use state incentive programs for business attraction. It should also provide some guidance for cities striving to assess their own local incentive programs.

The Pew Charitable Trusts recently announced the launch of the Business Incentives Initiative. This Initiative will help improve data collection, management and reporting within state incentive programs in order to “improve decision-makers’ ability to craft policies that deliver the strongest results at the lowest possible cost.”

Pew and the Center for Regional Economic Competitiveness will engage leaders from seven states (IN, LA, MD, MI, TN, OK, VA) to develop best practices for evaluating economic development incentives by:

  • Identifying effective ways to manage and assess economic development incentive policies and practices.
  • Improving data collection and reporting on incentive investments.
  • Developing national standards and best practices that states can use to successfully gather and report data on economic development incentives.

As project manager Jeff Chapman explained in an interview with Bloomberg BNA:

This initiative builds on Pew’s ongoing project to help state policymakers implement ongoing evaluation of economic development incentives. As states work to measure the effectiveness of these programs, they often find they lack the data needed to determine whether an incentive is producing the expected outcome. Further, there is currently no source that has identified and compiled the best practices on how to overcome this obstacle.

All states were invited to submit proposals to participate, and seven were selected. They have agreed to commit top decision-makers from economic development, revenue, and other relevant state agencies to work intensively with Pew throughout this 18-month program. Each of these seven states has also already begun to address the challenges associated with economic development incentive program management and evaluation. The Pew team will work with the states to develop and implement tailored solutions for each state, while also paving the way for development of best practices and training that will be available to all states.

I am pleased to be part of the Center for Regional Economic Competitiveness team working with Pew on this important effort. Our role will be to leverage our economic development and incentives expertise to provide technical assistance to the states.

Here at Smart Incentives, we have emphasized the importance of data, analysis, transparency and accountability in economic development incentive use. The lack of quality data regarding compliance and effectiveness is a significant problem for the economic development field and policymakers trying to do what’s best for their communities. The Business Incentives Initiative represents a notable step forward in enabling smart incentive use in all states.

HarpelEllen Harpel is President of Business Development Advisors (BDA) and Founder of Smart Incentives. She has over 17 years of experience in the economic development field, working with leaders at the local, state and national levels to increase business investment and job growth in their communities. 

Contact: eharpel@businessdevelopmentadvisors.com or ellen@smartincentives.org. Follow Ellen on Twitter @SmartIncentives.

The Latest in Economic Development

This week’s blog discusses a new report focused on the recent (and future) performance of the Great Plains, the Boston Consulting Group’s take on the skills gap, an example of the “knowledge problem” with regard to incentives in Oregon, and preparing your city for millennials. Comment below or send to common@nlc.org.

Get the last edition of “The Latest in Economic Development.”

A new report by Joel Kotkin takes on the role of America’s Great Plains in the 21st century. Many observers (those on the coasts) had predicted the region’s downfall, but in reality, the Great Plains have done very well: “Paced by strong growth in agriculture, manufacturing and energy – as well as a growing tech sector – the Great Plains now boasts the lowest unemployment rate of any region.” Three factors will continue this trend: 1) natural resource wealth; 2) technological advancement; and 3) demographic changes. Download the full report here.

The Boston Consulting Group says that the “skills gap in US manufacturing is less pervasive than many believe.” This statement follows the consulting firm’s continued predictions of a resurgent US manufacturing sector. BCG notes that the shortage represents less than 1% of all US manufacturing workers and less than 8% of highly skilled manufacturing workers. Furthermore, “only seven states – six of which are in the bottom quartile of US state manufacturing output – show significant or severe skills gaps.” That said, the report notes that a skills gap could be a growing problem down the road, particularly as high-skilled manufacturing workers begin to retire. The release also highlights a few programs designed to close the gap, including Quick Start in Georgia and the Austin Polytechnical Academy in Chicago.

Salesforce.com’s recent decision to open in office in Portland, Oregon, highlights the murky environment of economic development attraction, where imperfect information often places officials between a rock and a hard place. Utah was also trying to land the firm and was purportedly preparing to offer a multi-million dollar package, but no deal materialized. On the surface, the end result makes Oregon look foolish for offering generous terms when with no real competitor, but the idea that Oregon was pre-emptively preparing for an incentive war is probably misguided; the Oregon Business Development Department said that its offer wasn’t based on what Utah was or wasn’t offering. It “weighted the value of the Salesforce jobs against the cost of incentives.”

At Governing.com, Bill Fulton prophesizes that “just like baby boomers, the preferences of the millennials will drive our society for two generations. They’re making location decisions based on their idea of quality of life. And they’re going to make all those decisions in the next few years – by the time they’re 35.” Fulton reckons that if cities want to attract these up-and-comers, decision makers and planners only have a few years to set the tone. But he likes what he is seeing; from Omaha, Nebraska to Rochester, New York, second tier cities are developing urban cores to cater to millennial tastes.

*** The “Latest in” will go on a short hiatus and return in December.

The Latest in Economic Development

This week’s blog discusses a training program for high school students spearheaded by Mercedes-Benz, encouraging news for metropolitan exports, the difficulties in redeveloping small city blight, and a survey of recent economic development incentive articles.

Comment below or send to common@nlc.org.

Get the last edition of “The Latest in Economic Development” here.

Regardless of where you fall in the “skills mismatch debate,” it can’t hurt if younger generations are learning the finer points of advanced manufacturing. Mercedes-Benz is doing its part to make that happen. Realizing that they will need a steady stream of work-ready graduates, Mercedes is partnering with the Tuscaloosa City School System in Alabama to offer weekend classes for students interested in potential employment with the auto company. When enrolled in the Workforce Development Academy, students will participate in “applied mathematics, measurements, team building, team projects and field trips to the (Mercedes) plant. They’ll also participate in hands-on projects and learn about robotics.” Building a (free) bridge to future employments seems like a good deal to me.

Metropolitan exports increased nearly 40 percent since 2009 to total $1.31 trillion in 2011” says a blog post from the International Trade Administration. Here’s some good news: 13 smaller metro areas, including Asheville, NC and Yakima, WA, surpassed the $1 billion threshold in exports for the first time in 2011. Also, Detroit exported $49.4 billion in 2011 – the first time reaching this level since before the recession. ITA notes that “communities and metropolitan areas can leverage exports as an economic development tool.” NLC agrees.

To create a community redevelopment agency or not? That is the question being asked by some small cities in Florida in response to blighted districts.  For the city of Deltona, creating a CRA would allow a portion of property tax revenues to be allocated to “everything from landscaping and new utility lines to small-business loans in neighborhoods deemed blighted.” DeBary and Orange City are also exploring creating development districts. While city officials deem CRAs necessary for attracting jobs, they may be fighting an uphill battle. Since the CRAs would divert tax revenue from county to city coffers, poor revenues and strained budgets are causing the county do be more careful in doling out cash.

The economic development incentive debate is in full swing. Here are some recent highlights:

Samsung has indicated that it could “double its $13 billion investment (in Austin) over the next five years.”  But it depends on the Texas legislature. The issue at hand is a tax break that “allows steep discounts on school property taxes for qualified companies.” It could be the deciding factor in the company’s choice to expand in Texas or Korea.

Joe Taylor, the CEO of Panasonic, said that the company would have left New Jersey if not for tax incentives. Taylor stated that even with the incentives the company received, “it wasn’t the best move from a financial standpoint.” Good Jobs First called the New Jersey incentives a “very costly corporate tax giveaway.”

Steven Lanza of the University of Connecticut says that it would be better if all states discontinued aggressive incentives for economic development.  But because every state takes part in the zero-sum game, Connecticut has to play its part or risk “being taken to the cleaners.”

Policing incentives has moved to the forefront in Florida after a highly publicized deal with a James Cameron-backed animation company went bust.  Apparently, less than half of the jobs promised by companies receiving incentives from the Dept. of Economic Opportunity were actually created over the last 16 years.

“Business Friendly” in a New Era of Economic Development

There have been several reports recently connecting local and state tax environments to small business and entrepreneurial growth. In Business Tax Index 2012, the Small Business and Entrepreneurship Council created state scores based on 18 different tax measures that indicate the cost of their tax system on entrepreneurs and small businesses. Similarly, the Tax Foundation and KPMG published a slightly more nuanced analysis, Location Matters: A Comparative Analysis of State Tax Costs on Business.

There is no denying that tax systems impact business location decisions and their ability to grow, but can or should we still be determining a place’s “business friendliness” based entirely on tax burdens? This paradigm dominated economic development policy during the era of smokestack chasing, but is it appropriate when instead of trying to lure the next big company, a community is seeking to support existing small businesses and grow new ones from within?  It just seems like we’re having the wrong conversation.

Bloomberg BusinessWeek analysis reveals, in fact, that small businesses do not choose low-tax states.  States with the lowest tax burdens are not those with the most new business starts. Entrepreneurs generally do not relocate to start their business, they do it locally (another reason small business development and entrepreneurial support are favorable strategies to jumpstart local economies).

So, what, then, does “business friendly” mean for small businesses, entrepreneurs and start-ups?  Experts suggest that there is no one defining characteristic of a city or state supportive of small and new businesses.  Instead, it is a collection of elements comprising an entrepreneurial “eco system” — universities, large and small businesses and their leadership, ease of doing business, entrepreneurial support programs, workforce skills, financing, and probably a bit of luck.

There have been recent conversations, particularly on Capitol Hill, about what government should be doing to support this eco system, suggesting new incentives to spur small business growth. But do we need more incentives? According to NLC’s recently released a toolkit on Supporting Small Businesses and Entrepreneurs, the most effective avenues of support from governments, particularly local governments, are not incentives, but tackling efforts within city hall and partnering with external stakeholders. This can include helping to prioritize issues and outwardly demonstrating that entrepreneurs and small businesses are important to a community to reviewing and improving permitting and regulatory functions to bringing together service providers and business groups to help identify gaps, encourage collaboration and be a centralized information source.

Changing the conversation about how to encourage local economic growth starts with an appreciation for the new drivers of this growth, thinking fresh about economic development, and leveraging existing capacities to support the entrepreneurial eco system.