For cities, effective economic development demands informed, careful leadership from elected officials. It also demands funding — for investing in infrastructure, programs, education, and incentives.
Most communities use a mixture of strategies and funding sources to support economic development programs and initiatives. Some municipalities are also exploring the use of innovative tools and financing mechanisms. These common funding strategies can shore up and even expand your economic development efforts:
1. Dedicated City Funding
Most local governments budget for economic development activities using the city’s general fund (i.e., revenue from property taxes, as well as sales and/or income taxes in states where permitted). This funding pays for the programming and staff for the city’s economic development office. City funding pays directly for items such as business surveys, site visits, marketing campaigns, business education programs, redevelopment efforts and workforce development trainings.
Municipal governments also sometimes indirectly pay for local economic development through the use of incentives, including tax breaks for businesses. Typically, these incentive deals will waive a portion of property or commercial taxes as a strategy to attract a new business (and jobs) to the community. It is important for local elected officials to be familiar with the funding options specific to their municipality.
2. Targeted State Funding
Many municipalities also receive support from their state government for local and regional economic development initiatives in the form of on-the-ground programs or through direct funding. Some states also offer incentives directly to businesses as an attraction strategy. As with local funding sources, each state has its unique approach to funding economic development activities. Local elected officials should become familiar with state funding programs, not only to take advantage of them, but also to be an advocate for their continued funding by state legislators.
3. Federal Funding Support
There are several federal programs supporting local economic development strategies from the Economic Development Administration (EDA), the Small Business Administration (SBA), the Department of Housing and Urban Development (HUD) and other agencies. These programs provide direct federal dollars to state/local governments or businesses, as well as tax credits to developers or community entities. Some of the most common programs used by cities include:
- EDA Planning and Local Technical Assistance Programs
The Economic Development Administration (EDA) assists eligible recipients in developing economic development plans and studies designed to build capacity and guide the economic prosperity and resiliency of an area or region. The planning program helps support organizations, including district organizations, American Indian tribes, and other eligible recipients, with short term and state planning investments designed to guide the eventual creation and retention of high- quality jobs, particularly for the unemployed and underemployed in the nation’s most economically distressed regions.
- Community Development Block Grant (CDBG)
The CDBG program works to ensure decent affordable housing, to provide services to the most vulnerable in our communities, and to create jobs through the expansion and retention of businesses. CDBG is an important tool for helping local governments tackle serious challenges facing their communities. Beginning in 1974, the CDBG program is one of the longest continuously run programs at HUD.
- New Markets Tax Credit
The New Market Tax Credit Program attracts private capital into low- income communities by permitting individual and corporate investors to receive a tax credit against their federal income tax in exchange for making equity investments in specialized financial intermediaries called Community Development Entities. The credit totals 39 percent of the original investment amount and is claimed over a period of seven years.
- Historic Preservation Tax Incentives
The Federal Historic Preservation Tax Incentives program encourages private sector investment in the rehabilitation and re-use of historic buildings. It creates jobs and is one of the nation’s most successful and cost-effective community revitalization programs. The National Park Service and the Internal Revenue Service administer the program in partnership with State Historic Preservation Offices.
4. Public-Private Partnerships
Finally, a new approach to funding local economic development projects is the concept of public- private partnerships. These are contractual arrangements between a municipality and a private or corporate entity agreeing to share the responsibility of funding and managing an economic development project. According to the Government Finance Officers Association (GFOA), the structure of a public-private partnership typically includes the offer of funding, tax incentives, or public land from the local government, while the private organization promises capital investment, job creation, or development expertise.
This guide to economic development funding sources is an excerpt from NLC’s 2017 report What You Should Know 2.0: Elected Leaders and Economic Development. For more tools and educational opportunities for elected officials, visit NLC’s Center for City Solutions online.