This blog originally appeared on December 01, 2015 on Iowabiz.com.
Modern economic development- which tracks its origins to the formation local of industrial recruitment organizations in response to the economic downturn of the late 1970’s- has since its birth as a profession seen its practitioners grapple with persistent controversy and skepticism from the public regarding the negotiation and application of publicly-funded incentives to secure jobs projects in communities across the country. Economic developers have been struggling with how to effectively communicate the role incentives play in the process of the recruitment of human and financial capital to their communities for decades. The 1970’s. We haven’t made much progress.
Incentives play a fundamental role in securing job and wealth creation projects for communities in every corner of this country and in most countries of the world. This is pure, unadulterated fact. Public sector incentives are as principal to the decision-making process for most projects of size as is real estate and talent. There is plenty to discuss as it relates to whether this should be the case, whether some sort of federal edict ought to materialize which prohibits states and communities from competing with each other with incentives- something some policy makers and lots of armchair quarterbacks in the media are calling for- but that’s left for another blog. I will note what’s glaringly obvious: there is no national legislative cavalry coming thanks, I’ve got to believe [I’m no constitutional scholar, but still] on the commerce clause and the fact that such a decree would be impossible to implement and enforce.
Incentives are not the boogeyman; most economic developers subscribe to the sentiment that public financial inducements are designed to get a good deal done, not make a bad deal good. Put another way, incentives, when applied judiciously and as the result of a vigorous and transparent negotiation, have as central and appropriate a role in our public system of government as any basic government service. Incentives play a critical role in ensuring that millions of dollars of future tax base and thousands of jobs matriculate in our state rather than another, but the economic development profession at large has done a poor job of communicating this. As a result, the public, fueled by a general distrust in government and distaste for corporate America, has grown increasingly indignant about the use of incentives to grow and retain jobs and capital in states like Iowa. Such indignation and the predictable political posturing on the part of elected officials it spawns poses real threats to future economic growth in our state.
Judicious negotiators of incentives in Iowa and around the country have an image problem which is three-fold. First, we’ve grown accustomed in economic development circles to communicating the substance of incented projects in banal, aggregate terms that mean nothing to the average person. When an economic developer or organization reports that a local employer has agreed to a $20 million expansion which will create 35 new jobs, it’s often a single day’s news story thanks to the two-dimensional nature of how the project’s human and financial community impact is framed [or ignored]. We’ve got to get better at personalizing these projects, communicating the human impact of each new job and what it means to your family and your community- a job which may offer a struggling single parent or determined ex-offender an opportunity to improve their lot in life. Because most of economic developers have our professional performance at least in part evaluated based on aggregate job and capital creation activity, we’ve convinced ourselves that those blocky cumulative figures- instead of broadly accessible accounts of how these projects improve lives in our communities- are what matter to citizens wearily observing the use of public funds to grow business in Iowa communities. Too often we report to the public through the lens of our performance metrics, when the human impact of our work is the most compelling.
Second, we’ve been married to the ‘need-based’ narrative in incentives negotiation for far too long. While the concept of ‘need’ in negotiating incentives is sound- it suggests that public sector decision-makers only agree to incentivize a project to the absolute minimum extent necessary to vanquish our opponents and secure the project for our community and state- the word is a problem. Major companies do not, in a semantic sense, ‘need’ the financial allocations made available to them for most projects- balance sheets of Fortune 500 companies do not see an impact as the result of, for example, a package of tax credits or forgivable loans from a state or community. What’s needed is an effective mechanism to quantitatively communicate the central role incentives play in adjudicating a complex sales process and leveling the competitive playing field upon which job and wealth creation projects are fought for.
Let’s educate the public on the fact that in lieu of not-going-to-happen federal intervention, public incentives are a fundamental competitive component of any major project negotiation. We should find new ways to demonstrate this- to drive home the fact that failure to maintain and enhance a robust competitive incentives posture in Iowa is on par with a business failing to reinvest in its own people and product. And when that happens, the business shrinks- and dies. We need to educate the public about the competitive field we are playing upon for jobs projects and communicate the fact with more depth than our pat answer that ‘in a perfect world, we wouldn’t have to use incentives.’ Of course not. I’ve never lived in a perfect world; have you? We have an opportunity to elevate the discussion in Iowa and around the country to an informed one which considers the basic role incentives play in business decision-making today.
Finally, economic developers for decades have turned in a woeful performance in finding ways to effectively and clearly communicate the complexity of the incentives tools we use to land projects in our communities. Confusion reigns in the public about what economic development incentives actually do, and what they cost. Fueled by media reporting which is at best inaccurate and at worse misleading and pronouncements by some policy-makers who have determined that being against incentives is good politics, incentives have been teed up and demagogued, reduced to a single, wholly erroneous narrative: incentives are all cash out of the taxpayer’s pocket.
Not true. While most communities and states maintain so-called ‘deal closing funds’ which provide governments the capability to include a certain amount of performance-based cash- and it bears noting that Iowa has one of the smallest of these funds found anywhere in the country, and has for years- the nature of the vast majority of incentives awarded to projects in Iowa are credits against future revenue, or tax credits. Simply put, tax credits are instruments to provide a reduction in tax liability for future investments by a company- tax revenue we currently are not enjoying when agreeing to the incentive [because the project and its associated investment has not yet occurred]. Far too often, the total value of a tax credits package [which can include credits against state investment, local property and other tax streams] are represented to the public as cash, as, in effect, a check written by the government to the company. Couldn’t be further from the truth! In virtually all cases, tax credits are awarded not only after the company creates the tax liability, but physically creates the revenue- by paying its taxes. Only after the new tax receipts are received by the state and local governments does a company then receive a credit back. This is completely lost on most members of the public, and it’s on us as economic developers to find better ways to break down and communicate the complexities of incentives packages so that their fiscal impact is truly understood. Tax credits are but one example in a roster of complex local, state and federal incentives programs most people don’t understand [why would they?] but which we have to get better at demystifying.
I suggest above the economic development image problem has three components, but realistically it has many more. As an added bonus, consider the fact that virtually all incentivized projects in Iowa carry with them stringent ‘clawback’ provisions which legally compel the awarded company to pay back all or some pro-rated portion of any incentives it receives should it fail to fulfill its obligations related to job creation, wage levels, capital investment and the like. Now consider the last time you read a detailed account of a successful clawback executed by a government from a company for failing to fulfill its obligations. Part of this is a volume game- the men and women who negotiate incentives packages across this state are, by and large, excellent stewards of public funds and only greenlight packages which have a high probability of success, so clawback scenarios are not particularly common. But when they do happen, most economic development and other officials engaged in the process don’t court publicity for the process. I would submit that we can do a better job in the profession of educating the public when we do experience a clawback situation to make the public aware of the aggressive stewardship those responsible for overseeing compliance with economic development incentives demonstrate every day.
An added, added bonus element of the economic development image problem? New legislation in 2014 concerning how cities and counties report tax increment financing [TIF] activities now requires local governments to report their property tax credit-against-revenue figures at a ‘not to exceed’ level, which artificially makes project property tax incentives look enormous and is in most cases completely out of step with actual credit values.
I could go on. I will not. There is much work to do to better educate the public on what public sector incentives mean and how they are used and it is incumbent upon every stakeholder in the field of economic development- practitioners, elected officials, even companies utilizing the incentives- to find new ways to communicate the substance and the value behind such a controversial topic.