What Are ECONOMIC DEVELOPMENT INCENTIVES?

As I start this blog, I will not take for granted that everyone knows what economic development incentives are.  So, this is where I will start.

An economic development incentive (incentive) is a tool used to woo businesses to grow or relocate from one State to another in order to stimulate economic growth in a local economy.  As the downturn in the economy plummeted, competition for jobs increased tremendously.  Economic development agencies in each state and local economic development agencies within each state pushed why growing a business in their community was more beneficial to businesses.

Interest in incentives was very noticeable during the1980s and 1990s.  At that time public bidding wars were popular among local governments to encourage businesses to their communities.  Over the years, incentive packages became a big part of state and local governments’ efforts to stimulate growth in their local economy.  In an essay written by Melvin L. Burstein and Arthur J. Rolnick the authors indicated that competition among states for new and existing businesses has become the rule rather than the exception. 

In the 1990s, economists Alan H. Peters and Peter S. Fisher identified the following categories of incentives:

·         One-time deals negotiated with individual firms,

·         Grants and loans provided under programs that receive annual state appropriations,

·         Programs establishing parameters and limits but allowing some degree of local government discretion,

·         Incentives that function as entitlements, whereby a firm receives the benefit automatically, provided its investment is in an eligible sector and the size of the investment or number of new jobs created exceeds some threshold, and

·         Code features that apply to all firms, but benefit some more than others and are often advertised by economic development agencies as reasons to locate in a state.

Today, economic development incentives have their share of supporters and opponents.  On one hand, many consider economic development incentives as “business welfare”.  According to an article written by Brian Gongol, incentives create a good environment only for some businesses, at the expense of all other businesses. 

On the other hand, many believe that these incentives are required in order to compete for jobs.  For example, if a local business is considering a consolidation project (i.e. it is considering joining two of its business units into one location), it has to make a decision as to which one of two locations it would like to remain in.  If the two locations are in Florida and North Carolina, the business has to determine which of these states would be beneficial for its growth.  The business would look at what each location offers, in terms of access to railways, ports, suppliers, quality and quantity of jobs, etc.  The incentive package becomes an added bonus as it helps reduce the business’ costs for the consolidation.

Regardless of our opinions of economic development incentives, I believe they will be around for a long time.  For businesses either participating in these incentive programs or looking to participate in these incentive programs, my suggestion is to become very knowledgeable of the individual incentive packages that are available to you.  Once you determine a package that may benefit you, be realistic about your commitments because those commitments are what determine whether you will receive the ‘true’ benefits of these incentives – actual payments.