Chairman's Report: State Business Incentives

Each year, states spend billions of dollars on tax and financial incentives with the hope of spurring job growth. Research suggests incentives have increased in both frequency of use and size over the past 40 years, with some deals worth over $1 billion each. In addition, some states are using incentives to engage in a bidding war with other states, offering increasingly lucrative deals for existing companies to relocate from one state to another.

Despite the big price tag, state policymakers are often in the dark about what those incentives actually cost and how well they are working to achieve the state’s economic development goals. These concerns led to the creation of a national working group on economic development, led by 2012 CSG Chair Kansas Sen. Jay Emler as part of his Chair’s Initiative. This report is the culmination of the work of that group and provides a background into the current use of business incentives by states, as well as key observations of the group.

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FOREWORD

Tax and financial incentives have been used for decades by states to encourage economic development, and each year states spend billions of dollars on these programs. Many incentive programs are designed to create new jobs or help existing companies expand, but a state’s return on investment in these programs is not always clear. Other incentives are focused on encouraging a company to simply move from one state to another. High profile stories of states engaged in bidding wars over the relocation of businesses can be found in newspapers across the country. I wanted to know—is there a better way?

To begin to answer that question, a working group—made up of state legislators, economic development practitioners and private sector members—was formed and tasked with taking a closer look at how states use business incentives. Throughout our discussions, one thing became clear to the group: We simply don’t have the information we need to make good decisions about incentives. Other key observations of the group are provided in this report, which is the culmination of the working group’s activities.

The purpose of this report is not to advocate either for or against the use of business incentives by states—the category of “business incentives” as a policy tool for encouraging economic development is too broad to either advocate for or wholly condemn. Rather, working group members hope the insights found in this report will encourage state leaders to take a thoughtful, open look at their own state incentive programs and look for ways to improve.

It is our desire that this document not become one of those reports that sits gathering dust on some shelf. The working group hopes legislators, economic development practitioners and private sector companies make this a living document that provides guidance to everyone and advances all economic development, putting an end to border wars.

Senator Jay Emler, Kansas


EXECUTIVE SUMMARY

Key observations of the Working Group:

The cost of incentives—state leaders are in the dark: State policymakers don’t have an accurate accounting of the most basic of information about their state’s incentive programs—the cost.

Solid evaluation of existing programs is lacking: In addition to comprehensive cost estimates, reliable evaluations of the performance of existing programs are not available to policymakers, which are needed to make informed, data driven decisions.

Missed opportunities: While a well-designed and well evaluated incentive program may be effective, relying on incentives as a primary economic development strategy could mean alternative methods are ignored.

Bidding wars: Is there a better way? Given the potentially negative effects of bidding wars, finding alternatives should be a goal of state leaders.

Increasing inter-branch communication: Regular conversations across the legislative and executive branches are needed to ensure that practitioners have the tools they need to effectively implement policies and so that legislators maintain real-time insight as to how their policies are functioning.

Public Transparency: Just as policymakers need information about business incentives to make informed decisions, the public needs information about how its government is functioning to remain engaged in the democratic process.

 

  Download the Brief in PDF / E-Reader Compatible Format

 

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