Do Tax Incentives Have Their Place?

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The use of tax incentives to spur economic growth has come under scrutiny over the years.  There are claims that incentives allow businesses to play communities off one another, promote “zero sum” economic growth, and essentially do nothing to actually lure businesses (who in all likelihood have already decided on their location).

And from the practitioner side of things, there seems to be something to this.  In a recent study of site selection specialists, quality of life, efficiency of the municipal permitting process, and many other factors within the control of local government outweigh tax incentives in business’ location strategies.

Analysis by Good Jobs First of Pennsylvania’s use of incentives to draw high-tech companies concludes that broader forces, such as globalization, take the economic development game out of the hands of local governments and limit the realistic effectiveness of tax incentives to create jobs.

There are plenty of places that have abandoned tax incentives as an economic development tool in favor of more “entrepreneurial” strategies to create economic growth, such as business incubators, revolving loan funds, and foreign trade zones.

But in a weak economy where job creation reigns, and the competition for jobs is more heated than ever, do tax incentives have their place? Compounding this issue is persistent fiscal strain, placing local governments between a rock and a hard place.

Take Austin, Tex., for example, whose city council has recently debated its economic development strategy with the prospect of landing Hanger, a medical device maker, after losing some key deals to San Antonio.  Austin has a relatively strong economy and has traditionally relied on its quality of life, educational institutions, and strong workforce to support business growth. However, “a weak economy has made more companies aware of incentives and made more cities willing to up the ante to attract and retain quality jobs in desirable, growing industries,” reported

Austin has made a deal with Hanger, but key to the decision was a strategic analysis of the incentives:  What is the long-term economic and fiscal impact? What types and how many jobs will this bring to the community? Will this advance the city’s potential to build an industry, with suppliers, other similar firms, and linkages to universities?

Arlington, VA is now in a similar position with the recent announcement that Northrup Grumman will be moving its headquarters to the Washington, DC-region. But where- DC, MD or VA? Because of the extensive incentives on the table and fierce competition between communities for the HQ, Washington Post’s Steven Pearlstein and others are calling for a “financial disarmament treaty” and making a renewed call for regionalism.

Arlington, VA Economic Development Executive Director Terry Holzheimer defends Arlington’s use of incentives as part of a strategic approach to economic development. “At the end of the day, it is never smart to get carried away by the heat of the competition and make an offer that doesn’t pencil out. In Arlington, we know who we are, we want to work with those who buy into that vision and who want to be part of this community for the long haul.”

So, to answer the question, although greater cooperation between communities and less game-playing on the part of the private sector would be ideal, the reality is that the economic development game may sometimes call for the use of tax incentives, with some stipulations: they should be part of a broader place-based economic development strategy, contribute to longer-term economic and fiscal stability of the community, and be tied to intensive analysis and performance measures.