Economic Development Incentives: How to Measure Results

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• published: 29 Apr 2015
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Each year, states collectively spend billions of dollars on economic development incentives. Are they worth the price? The answer isn’t always obvious. By asking key questions, states can evaluate incentive programs and provide the evidence policymakers demand. Learn more at: http://www.pewtrusts.org/en/projects/economic-development-tax-incentives *Transcript* What’s the recipe for successful economic development? Many states are using incentives -- such as tax credits, grants or loans given to companies to encourage them to do something they would not otherwise have done. States have dramatically increased spending on incentives. Each year, states collectively spend billions of dollars on these programs. Are they worth the price? The answer isn’t always obvious. By asking key questions, states can evaluate incentive programs and provide the evidence policymakers demand. Let’s say a state offers incentives to….. the food industry. Tax credits go to Bob’s Bread Basket and Sofia’s Snacks. Now, both companies enjoy lower costs and earn a larger profit. Bob plans to expand his building and upgrade his equipment. Sofia lowers the price of her famed Grizzly Bear Granola Bars and hires new employees to keep up with increasing demand. Both companies are expanding. But to what extent were incentives responsible? When the incentive lowered Sofia’s costs, she hired new employees. But even without the incentive, her company still would have grown, so not all the new jobs at Sofia’s Snacks are the result of the incentive. Let’s go back to Bob. He needed the incentive to expand his building, but he had already saved to upgrade his equipment. Another key question to ask: how does the incentive affect other companies in the state? If Sofia sells her granola bars locally, Ernie’s Energy Bars could lose customers because of Sofia’s lower price. Eventually, Ernie may let some of his employees go. But if Sofia ships her Grizzly Bear Granola Bars nationwide, she’ll bring in money from outside the region and expand the size of the local economy, which would be good for local oat farmers who sell to Sophia. And Bob’s building expansion creates job opportunities in the local construction industry. But, will all these jobs go to local workers? Sofia’s profits continue to rise as she increases her national sales, and she needs to hire more employees. Some of these jobs will go to unemployed locals. But, research suggests that more than ½ of new jobs will eventually be filled by out-of-state workers who move into town. So – do the benefits of incentives outweigh the alternatives? Incentives are just one option for states. And they should be compared to other priorities, such as spending more on education or transportation, or tax cuts for all businesses. A dollar spent on an incentive can’t be used on something else, so states need to decide whether they are worth the price. All states want the recipe for economic success. But only by answering key questions will your state know whether an incentive is the right ingredient for successful economic development. Learn more about how states are effectively evaluating incentives: http://www.pewtrusts.org/en/projects/economic-development-tax-incentives