Balanced Advice on Incentives

Incentives have long been a “Catch 22” for communities: Damn if you do and damn if you don’t. The jury remains out whether they produce more benefits than costs in the long run to communities. Although, greater evidence exists that tax incentives tend to produce greater costs than benefits for communities, and infrastructure and workforce investments tend to produce greater benefits than tax incentives for both communities and companies. In a nutshell, that is where the incentives debate sits with communities.

But how are incentives seen by companies? A recent Trade and Industry Development Magazine article provides a fairly well balanced discussion of the pros and cons of incentives. Here is a summary of the article.

  1. Incentives often distract companies from core drivers in making a site location decision. Incentives are never the most important thing, and yet many companies are overly seduced by what they wrongly see as “free money.”
  2. Incentives often mask location deficiencies (inadequate labor force, high tax rates, insufficient infrastructure, environmental constraints, etc.) that communities try to offset with tax and financial incentives.
  3. Incentives can reduce a community’s long term ability to fund good schools, infrastructure, and community amenities, which are the very assets needed to support local business and job growth.
  4. Incentives subject companies to greater public scrutiny, especially with heightened compliance reporting requirements.Trust me that these requirements will grow and not lessen in the future.
  5. Given the growing uncertainty in the economy and the world, can the company meet its job and payroll creation requirements defined in incentive requirements? The reality is it is harder to attain these requirements. And now communities are using “clawbacks” more frequently to make the company payback money it has not earned under the incentive agreement.
  6. Finally, incentives are being seen increasingly as “corporate welfare” by the public, especially at a time when wages are not growing and benefit packages are being slashed by many companies.

Is it worth it? My answer is only if companies and communities agree to use incentives very responsibly. The days of the “community candy store” offering lots of goodies to companies is over. The better way is to invest in creating a high quality workforce, infrastructure, and quality of life amenities (not necessarily tourism attractions).

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