Tuesday, September 23, 2014

Who really benefits from incentives?

By Jim Vaughan, Senior Fellow.

Now that the latest economic development project-of-the-century has been sited—this one so big it’s called a “gigafactory”—questions are being asked again about who really benefits from the incentives that governments are giving to attract or retain businesses and industries.
Regardless of your position on the subject, it’s a fact that the playing field on which communities compete for jobs and investment tilted toward Nevada when the Silver State gave $1.25 billion in incentives to the electric vehicle manufacturer, Tesla, and Panasonic to make lithium-ion battery cells in Reno.

Tesla may be a good deal for Nevada and for America—only time will tell—but the cost to compete for new projects just went up for every city, county and state including Nevada.

Incentives are nothing new
During my career, incentives have included free land given to companies from up north to come down south, workforce training for employees of new companies, building roads and infrastructure, and abating taxes for up to 10, 15 and now 20 years. But instead of a sweetener to close a deal, incentives today are often the starting point when presenting a community to a prospect.
In my first post on the Market Street blog on December 21, 2012, I wrote about the pushback from a New York Times series on corporate incentives and suggested that it could affect one of the tools in the business recruitment and retention toolbox.

The Times identified 48 companies that received more than $100 million in state grants since 2007. The leader, General Motors, got $1.77 billion through 208 grants for projects in 16 states. Now comes Tesla receiving $1.25 billion for one project in one state!

I could make a case for the Tesla deal based on it being in the national interest that we make cheaper and more efficient batteries for automobiles. Battery powered cars, after all, will help America reduce greenhouse gases that contribute to global climate change. But the Tesla incentives aren’t based on their value to the nation. Instead, they’re coming from a state to influence the location of the plant.

What’s the return?
After the announcement, Richard Florida, a critic of incentives in the aftermath of the NY. Times series, again made the case that “incentives play little if any role in companies’ location decisions. They are based on more fundamental factors like labor costs, the quality of the workforce, proximity to markets and access to suppliers,” he said.

Florida said companies have “learned to game the process” and that certainly seems plausible in the Tesla case. The company broke ground in June for the plant in Reno even as reports suggest it continued to negotiate with Arizona, California, New Mexico and Texas officials for an even better deal for another three months.

While the Times and Florida question whether incentives influence location decisions, a Lincoln Institute of Land Policy report went even further. “There is little evidence that tax incentives are an effective instrument to promote economic development (even as) they cost state and local governments $5 to $10 billion each year in forgone revenue,” the report said.

Questions we should be asking

Can we have a serious, national discussion about who really benefits from the incentives that governments are giving to attract or retain businesses and industries? The questions that should be asked include, 
  • Why are cities and states subsidizing profitable companies with incentives and tax breaks?
  • Do incentives really influence location decisions?
  • If incentives are gravy for businesses receiving them, how can they be stopped?
  • What if incentives are a good deal for the local community but are a zero sum game for the U.S. overall?
  • Is this an issue that should be addressed nationally?
Market Street has helped its client communities develop holistic strategies for sustainable growth and development based on measurable improvements in education and workforce development; a competitive business environment; 21st century transportation and infrastructure; and a superb quality of life.

Our strategies are framed in terms of “people, prosperity, and place.”

Maybe with the right strategy, you won’t need to offer incentives.