New Scrutiny for Development Incentives — Really?

By August 23, 2007General

Worthy-enough examination of economic development incentives on the front page of Wednesday’s USA Today.

Generous tax breaks given to companies that threaten to take their business elsewhere are coming under increasing scrutiny from state and local officials who say taxpayers aren’t getting their money’s worth.

Critics say the tax breaks and other incentives have gotten out of hand, costing taxpayers billions of dollars and doing little for the economy.

There’s an entitlement mentality about tax breaks today,” Kansas City, Mo., Mayor Mark Funkhouser says. “Every developer thinks it’s his right not to pay property taxes.” Funkhouser was elected mayor in May after campaigning against tax breaks to developers, including one for a luxury condo development in an affluent part of his city.

Fine. A reasonable position to take (especially for residences or retail development as opposed to more wealth-creating manufacturing facilities).

Except, how long have been reading stories like this one, about policymakers tiring of the economic-development competition and all the incentives they’re forced to offer? This ex-reporter wrote the same basic story in Bismarck, North Dakota, back in 1991, and it wasn’t a new idea back then. Quoted somebody from the John Locke Foundation in North Carolina, if memory serves. And here’s a paper on the topic from two Indiana University professors from 1985: “Sensible State and Local Economic Development .”

Resistance to government tax breaks comes generally from two factions, libertarian/conservative advocates of limited government and liberals who want more tax money for government jobs. (Both characterize themselves as opposed to corporate welfare.) Neither is powerful enough to form a governing coalition that will unilaterally eliminate economic-development incentives, and we say unilateral because of the near impossibility of some national stand-down on wooing businesses.

The odd thing is, these eco-devo incentives generally come fourth or fifth on the list of business priorities when selecting a site for a new facility. Look at the methodology from CNBC’s “Top States for Doing Business.” The top five categories for judging a business climate: Cost of Doing Business; Workforce; Economy; Education; and Quality of Life. Incentives are at most a subset of the “cost of doing business” category, but all the incentives in the world won’t attract a business to a location with a lousy workforce, shaky economy and horrible schools.

Perhaps, then, the complaints about having to offer incentives come from leaders whose locations lack all those other positive attributes. So, go ahead, put the incentives on the back burner. Fix the schools, making the regulatory environment more rational, and train your workers, and incentives won’t figure as prominently.

P.S. The USA Today story has a sidebar on Muskegon, Mich. Boy, do they have incentives.

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