New Reports Show Significant Spending and Uneven Success with Economic Development Incentives

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[authors: Ares Dalianis and Scott Metcalf]

Over the past two years we have written several Alerts on the various tax incentive programs available in Illinois to spur economic development [Explaining How Certain Tax Incentive Programs Work – Part I and Part II] and provided information on the history and implementation of tax increment financing (TIF) districts both locally and nationally.  Recently two additional resources have been published that review all economic development incentives – a series in The New York Times and a new study from the Lincoln Institute of Land Policy.

The three-part series from The New York Times, published this week, looks at the full range of economic development incentives including income, property, and sales tax abatements, enterprise zones, and TIF districts, among others.  Part I examines the scope of incentives at the national level and yields some fairly startling statistics.  Nationwide, the Times uncovered incentives worth more than $80 billion per year to a wide variety of businesses.  That number is believed to be understated as it does not include many local incentives, from school districts for example, that do not normally track the value of firm-specific property tax abatements.  For several states, these incentives equal one-third of the states’ annual budgets.  The Times also reported that there is usually very little follow through after the granting of an incentive to verify that the number of jobs created approximates those promised or the effectiveness of the incentive in inducing businesses to locate in a particular locale.  Further, the Times coverage includes a discussion on the often unequal bargaining power of state and local governments with major employers and the imperfect and incomplete information most governments are faced with when negotiating these incentives.

Part II of the series looks at the state providing the largest dollar value in incentives – Texas – at more than $19.0 billion per year.  The Times examines where the incentive money comes from, how that money is being spent, and what taxpayers are getting in exchange for these programs.  Part III of the series examines one industry’s success – the movie industry – in wringing incentives from state and local governments.  The Times’ reporting takes a critical look at how governments analyze and evaluate applications for economic development incentives and how that money is ultimately used.

A second resource published recently is a 76-page report from the Lincoln Institute of Land Policy, a Cambridge, MA-based foundation providing education and research on land use, regulation, and taxation.  The Lincoln Institute’s report is entitled ‘Rethinking Property Tax Incentives for Business’.  The report focuses on the various types of property tax business incentives, evaluates the effect these incentives have on firm location decisions, and provides tools for assessing the effectiveness of these incentives.  Among the report’s recommendations are that the proliferation of incentives should be restricted.  The Institute recommends that they be used only when genuinely needed, for example, in areas of high unemployment, and not as a routine form of assistance.  Second, the report recommends that all affected governments approve incentives.  Currently, many forms of incentive are adopted by one level of government (i.e., the state) or a by a municipality, but have an impact on taxpayers of many other governmental entities.  Third, the report suggests that the government approving the incentive have objective criteria in place prior to evaluating a request for benefits.  This would ensure that all applications are reviewed using consistent standards.  Fourth, the report urges greater transparency in reporting on incentives annually in order to determine whether they are effective and providing protection to the taxpayers.  The report includes much additional information and analysis beyond the scope of this Alert.

The New York Times series on incentives and the Lincoln Institute report both shed important light on a topic that is of significant interest to Illinois school districts and other units of local government.  The more information governmental leaders have when developing, evaluating, and approving, incentives, the greater the likelihood of making informed, fiscally-sound, and prudent decisions involving the use of taxpayer funds.

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Topics:  Economic Development, Tax Incentives

Published In: Administrative Agency Updates, Finance & Banking Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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