Economic Development Incentives: Effective?

Stafford County, Virginia

Tim BaroodyMay 4, 2013

PAPA 6224

Incentives should be kept in place!Suburbanizing communities are being pressured by

population growth, and political influences, which are actively working to break the heavy historic reliance on residential real estate taxes to produce revenue.

Transition is happening slowly but steadily, placing increased pressures on suburban communities to meet more demanding residents.

High demands for business driven, cost effective, expanded government services, even in a down economy, are now the norm in Virginia – and Nationwide.

Incentives can be tools to accomplish these goals. …But some continue to object.

Necessary to Differentiate Stafford is increasingly focused on economic development

initiatives, in an effort to grow and diversify its economy.Stafford developed an Economic Development Strategic

Plan in 2006, having it adopted by the Board of Supervisors in 2007.

This plan was complimented more recently by the Board of Supervisors’ effort in 2010 when they adopted their Economic Development 10 Point Plan. Efforts are focused on increasing tax revenue needed to support public safety, infrastructure, parks and recreation, schools and other quality of life enhancing services and amenities.

Incentives: Added Tools Neither document or effort has led to the breadth of and speed of

achievements the Board or the Community has desired. High end shopping, major business headquarters relocations, large numbers of high paying jobs, significant decreases in real estate tax rates not yet achieved – to the satisfaction of all.

So, Technology Zone and Stafford Opportunity Fund Created and funded.

Incentives: A Very Brief HistoryAlthough they have been around for many decades, incentives

as we know they surged in the 1980’s and 1990’s. Mega deals included Nissan at $33 million, Toyota at $150

million, Mercedes-Benz reported at $258 million. These deals gained the attention of Congress and others.

Research began in earnest to analyze economic development deals.

Researchers Fisher and Peters analysis of incentives demonstrated that they typically cut business cost 20%, but they believed that the effect was too small to affect business location decisions.

However, generally “studies suggest that incentives can be effective in certain situations.”

(Dan Gorin, Federal Reserve Bulletin, Vol. 93, 2007)

What are others saying?Joint Legislative Audit And Review

Commission (2013)Precise estimate of Business Decisions Swayed

by Virginia Incentive Programs Unknown. Researchers estimate approximately 10%

swayed by Incentives. Virginia impact equates to:

6,967 jobs $9,300,000 State gross domestic product State revenue net of $91 million in incentives

= $ 353,000,000 over 5 year period

…A good return on investment.

ContinuedHouse Joint Resolution 75, a bill championed by Delegate Mark

Cole of Spotsylvania, authorized a study titled “Local Incentives to Private Businesses for Economic Development Purposes.”

The study was conducted over the summer and fall 2008, chaired by Delegate Cole and seven of his colleagues. One economic development professional was also invited to participate.

Effort was to 1) determine all incentives localities are permitted to provide 2) evaluate the impact of such incentives on smaller local businesses 3) evaluate effectiveness of the incentives.

Ultimately, according to Virginia’s Legislative Information System executive summary, the effort “despite extended discussion no consensus was reached on either of the proposals” offered.

(LIS, House Document No. 10, 2009)

Continued Other research on incentives was recently conducted by the Pew Foundation.

In its “Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth,” the non-partisan group evaluated all 50 states and their incentive programs.

Concluded that 13 states are “leading the way… meeting both criteria for scope of evaluation and/or criteria for quality of evaluation.” Twelve states had mixed results (including Virginia) and 26 states were not meeting any of the criteria for scope or quality of evaluation.

They again have attempted to provide an evaluation so that policy makers can better understand how their states are doing compared to others in demonstrating return on investment.

(Pew, Evidence Counts Report Summary, April 12, 2012)

ContinuedThe Federal Reserve Bulletin entitled “Economic

Development Incentives: Research Approaches and Current Views,” asked similar questions about the appropriateness of incentives as local and state economic development policy.

After more rigorous evaluation of incentives a more favorable result emerges on incentive effectiveness. Specifically, the report states, “by conducting and identifying studies that used more detailed data and more refined techniques, Newman and Sullivan compiled the evidence of the effectiveness of incentives. (Federal Reserve Bulletin 93, 2007)

Criteria/Alternatives Matrix (CAM) or Goals Matrix

Criteria No Incentive

Status Quo Enhance Incentives

Other Approaches  

Return of Investment  

Potential Savings of $500,000 or more

$ 500,000 More than $500,000

Cost, but program and market dependent

Fairness to

existing business  

Would be perceived as most fair

Not as fair Least fair Could be fair

More Business 

Not achieved Likely More likely May be likely

Quality of Life 

Not improved Likely to be enhanced

More likely to be enhanced

May be enhanced

RecommendationContinue incentive Program as is, and institute

an aggressive program of evaluation to ensure return on investment is achieved.

Ensure analysis is transparent, and open to all to review.

Tweak program as needed to ensure effectiveness, and goals are being met.

If ROI is demonstrated, consider annual increases to incentive program to further

differentiate!

Questions?