Thursday, December 20, 2018

Ill Prepared for the Coming Debate

By Evan D. Robertson, , Senior Project Associate

It’s the end of the year, a time that welcomes the simultaneous mix of reflection and looking ahead. What a year it has been for economic development. And what a year it will be for the field in 2019. Perhaps the most pivotal event this year was the Amazon HQ2 process. From the get go the process was tailor made to attract attention and generate hype among politicians and economic development stakeholders throughout North America. An unintended consequence of this was great public debate. Where most economic development projects undergo little scrutiny by the general public, the HQ2 process brought economic development incentives into the fore. With school systems and transit struggling to keep pace with growth, many rightly question whether Washington or New York can afford rather sizeable foregone tax income to support a project which almost certainly will place even more stress on public assets that so desperately need revenue.

It is fortuitous then that 2018 also coincided with local governments’ wider spread adoption of the Government Accounting Standards Board (GASB) Statement 77 – a policy that provides guidelines for local government tax abatement disclosures. Increased tax abatement visibility among constituency groups combined with newly released data on their local impact could culminate into a disastrous backlash as the public overreacts (as we tend to do in a social media driven world). For decades tax abatements have gotten a free pass largely because no one measured the long-term impacts of foregone revenue. Next year could be when that free pass vanishes. A minimum community and economic development professionals must be prepared to answer critical questions about past, current, and future returns on investment from tax abatement and incentives. Leadership and stakeholders should also prepare for greater public involvement in their provisioning.

Tax abatements and foregone revenue strike at the very heart of things that political constituents care about locally: schools, transportation infrastructure, park and recreation amenities, and millage rates. These are not tax revenues that have already been set aside for an economic development purpose. When things don’t work (i.e. stagnant teacher pay, crumbling infrastructure, low test scores), these abatements could become a scapegoat. In December of 2018 Good Jobs First gave a glimpse of the coming pushback. According to the study, schools in 28 states lost an estimated $1.8 billion in the last fiscal year.[1] Good Jobs First is certainly transparent in their intentions – the report estimated that the ten most impacted states could hire almost 28,000 teachers at each state’s average teacher salary.[2] Combined with ongoing teacher strikes, low test performance, and trailing per pupil spending in some states, abatement data strike at a sensitive nerve.

As Statement 77 data undergoes further scrutiny, we as community and economic development professionals must come to terms with the fact that the profession has historically done a poor job measuring, tracking, and communicating foregone tax revenue and its impact on future community objectives. Given our charge, it is understandable. At the front-lines of economic prosperity, future tax rolls are often sacrificed for immediate job creation. At the same time, the shortcoming of the data to public discourse is that it makes no estimation for what a local government’s tax revenue would be without the job creation induced by the abatement or incentive. School systems in the Good Jobs First study might be short $1.8 billion, but they also might be short more than that if abatement supported employees living in those districts were elsewhere.

Community and economic development is soon entering a new climate after much needed change. In a data driven world, optimization is the soup-du-jour. Much talked about artificial intelligence and machine learning technologies are, at their core, tools to optimize process and decisions – these tools find the most efficient path to make a delivery, discover the most appropriate price to pay for a stock, or estimate how much a customer is willing to pay for a plane ticket among other problems. With greater insight on tax abatement data and outcome metrics (job creation, wages, etc.), Statement 77 might just give community and economic development professionals an opportunity to improve efficiency and effectiveness.

Over the long-term, tax abatement data will prove to be a vital piece of information that affords the profession an opportunity to optimize the provision of economic development incentives. Once all local governments around the country report abatement and incentive data, we as a profession can answer a critical question that has plagued us for so long: how much does my community need to give up to sway this company? At the end of the day, this is an optimization problem and one, in the absence of data that has historically been solved at the other end of the table. While Statement 77 will undoubtedly give professionals a short-term headache, it may also bring greater balance to the site selection process – particularly during negotiations. Preparing to listen to constituents, address their concerns, and show economic development metrics that prove ROI – for residents rather than investors – might be good preparation for 2019.

[1] Good Jobs First. “The New Math on School Finance: Adding Up the First-Ever Disclosure of Corporate Tax Abatements’ Cost to Public Education.” Good Jobs First. December 2018.
[2] Ibid