What is economic development?
Economic development is government intervention to promote private sector economic activity in a particular locale. Intervention can take a variety of forms, from marketing campaigns, to investing in improvements to regional amenities, to the direct purchase of economic activity by subsidizing the construction and operating costs of new businesses.
The expansion of the local economy is at the heart of economic development. The assumption is that economic expansion will create new jobs: jobs that residents need, politicians promise, and local economic development officials work to deliver. States, cities, and counties all have departments specializing in economic development. These departments, along with related quasi-governmental development agencies, serve as marketing reps for their jurisdictions, reaching out to court businesses and sell the virtues of the region.
To improve their region's sales pitch, public officials give a lot of attention to enhancing their “business climate,” the highly subjective and hotly-debated term for the way in which businesses view an area's “business friendliness” and ability to meet their operating needs. Companies weigh many factors when deciding where to locate. High on the list are business basics such as such as proximity to customers, proximity to suppliers, the availability of skilled labor, the quality of infrastructure, and the supply of the key inputs needed for their particular business (water, air transport, a university research and development center, etc.). Companies also evaluate a region's quality of life, looking for good schools, safe neighborhoods, and cultural amenities that add up to a desirable place for employees to live and raise families.
In addition to touting all of the features above, local development officials often resort to another tactic when negotiating with prospective corporate neighbors: economic development subsidies.
What are development subsidies and how do they work?
Development subsidies are cash, tax breaks, and in-kind benefits given to companies to offset the costs of opening or expanding a new facility. Subsidies take many forms, from reduced tax rates, to cash grants, to cheap loans, to name a few.
Many people call subsidies “incentives,” but that's not really accurate. An incentive motivates someone to do something they would not have done otherwise. A mountain of evidence suggests that development subsidies are often abused by companies that would have done exactly what they did anyway. “Subsidy” is also a more accurate description of what an aid program does when designed and used well: taxpayers subsidize companies to cover the additional cost of building where they serve a public purpose but could not afford to locate without public assistance. Subsidies of this type have what's called a “but for” clause that companies must meet, proving that but for help from the subsidy, the project would not happen at the site.
There are many types of development subsidies, and they reduce development costs in a variety of ways. Some of them reduce taxes; others are given as cash; still others save companies money by reducing the cost of construction or of borrowing capital. Common subsidies include:
Tax abatements reduce or eliminate the taxes a company pays to state and/or local governments. Commonly used abatements include property tax abatements, sales tax exemptions, and inventory tax abatements.
Tax credits reduce or eliminate state corporate income taxes by allowing a company to deduct a certain percentage of a specific kind of expense dollar for dollar from what it would normally owe. Examples include credits for research and development, spending on new equipment, and employing hard-to-hire workers.
Industrial Revenue Bonds (IRBs) reduce the cost of borrowing money. When local governments issue bonds, the interest on the bonds is tax-free. Companies get what amounts to a low-interest loan.
Infrastructure assistance lessens the price of construction by shifting the cost of improvements or expansion of roads, sewers, water lines, and other utilities to local governments. Improvements may be made on the project site (i.e. bulldozing existing structures or preparing land) or off-site (i.e. adding a stoplight to reroute traffic or rebuilding a bridge to accommodate heavy trucks).
Grants are subsidies given as cash to companies. Usually grants must be used for a specific purpose, such as worker training. Some states and cities award grants for general use.
Land-price write-downs reduce the cost of purchasing land. A development authority (the quasi-governmental arm of state or local development departments) typically buys the land and then transfers it to a private developer for a price below the authority's acquisition cost. The local government may also pick up the tab for the exercise of eminent domain, demolition and clearance, and/or environmental cleanup.
Tax-increment financing (TIF) uses the property tax collected on the increased property value of a new development (and in some places the newly-generated sales tax) to pay for infrastructure, land acquisition, or other costs of the development.
Enterprise Zones (a.k.a. Empowerment Zones, and by state-specific names such as Michigan's Renaissance Zones or New York's Empire Zones) are geographically designated, economically-depressed areas in which companies can get multiple subsidies (usually property tax abatements, inventory tax exemptions, and various corporate income tax breaks, including employment tax credits).
Many of these programs are paid for through tax expenditures, tax revenue that the state (or city or county) does not collect as a result of the subsidy. Others are direct expenditures, money that the government allocates in its budget, for anything from printing stamps to buying land to enable a hospital to expand. Tax expenditures far exceed direct expenditures for economic development, and are rarely tracked. Direct expenditures are part of the budget and must be approved by the city council or state legislature every one or two years.
Subsidy programs also fall into one of two categories depending on how companies qualify for them. Entitlement subsidies are automatically available to any company that meets a certain set of criteria. For example, if a job training tax credit specifies that a manufacturing company qualifies for a $2,000 tax credit for each new employee it trains, then any manufacturer that meets that requirement is entitled to claim that subsidy when it files its income tax return.
Discretionary subsidies are awarded on a case-by-case basis through individually negotiated deals between governments and companies. There may be no specific criteria that a company must meet, or very broad, loose criteria that give officials a lot of discretion in determining whether a company gets a subsidy, or how large a subsidy. Examples include property tax abatements, tax-increment financing, and land-price write-downs.
For more detailed information about specific subsidy programs, see the section on the basics of subsidy programs in the Researcher’s Guide.
Who decides, who pays, who benefits, who loses?
Economic development decisions are made largely behind closed doors by political and corporate powerbrokers. Public officials and developers use their political power and influence on the news media to portray economic development as a complex, secretive process beyond the understanding of the average citizen. Although the purpose of economic development is to improve the quality of life for local residents, residents rarely have much input into what form that improvement takes or how it will be brought about.
When citizens do attempt to participate, they often find that they cannot obtain even the most basic information about the deals being considered. Those seated at the negotiating table claim that the details of subsidy talks must be kept secret until the deal is sealed, or companies will bolt. The result is that a company's announcement to build in an area, accompanied by the government's announcement of a large subsidy package, is often the first official word the public hears about a development project.
Politicians and companies clearly benefit from these subsidy deals, even before construction begins. CEOs, mayors, and governors use deal announcements as rosy publicity stunts, garnering public approbation for bringing what are often badly-needed jobs to an area. What gets lost after the news cameras stop rolling is the fact that these big subsidy deals don't always yield community benefits. While development agreements lay out in detail the tax breaks and other benefits to be reaped by businesses, it is far less common for governments to get companies' commitments in writing. The number of jobs a project is slated to create is always the centerpiece of the press conference, but the creation of those jobs may not be a binding condition of receiving the subsidy.
It is even more rare for a development agreement to spell out a list of the benefits a project is required to provide beyond the general promise of jobs, such whether the jobs will pay living wages, provide health benefits, hire local residents, and be accessible by public transit; whether the project will be environmentally responsible; and whether it meets other community needs such as the creation of affordable housing or the preservation of open space.
Without binding, enforceable commitments in these areas, communities too often find they are left out of the benefits a development brings. Companies often cite their good intentions and protest that their word is enough, but reality shows otherwise. There are hundreds of scandals involving subsidy abuse among corporations: companies that pocketed millions in tax abatements and then moved to another state; companies that received subsidies for job creation but created no jobs, or even laid people off.
And the worst part is, there are hundreds more such scandals that we don't even know about, because governments rarely check up on companies to see if our investments in them are paying off. When a subsidized company fails to produce real benefits for local communities, it is residents that lose out.
What's wrong with development subsidies?
There are many problems with both the concept of development subsidies and the way in which they are typically implemented, monitored, and enforced. Criticism of subsidies and calls for reform come from both the private and public sectors, as well as from both ends of the political spectrum. The major problems with development subsidies include:
1. The process of awarding subsidies lacks transparency and public participation
Most subsidy decisions are made in private meetings, with the public only being let in on the details at the press event announcing the signed deal. The shroud of secrecy and relegation of development decisions to the domain of "experts" by companies and public officials often serves to discourage public participation. When avenues for public participation are available, such as a public hearing, they tend to be poorly publicized and announced too late for community members to organize more than a cursory response to the issues on the agenda.
2. Subsidies often lack binding requirements as to the benefits companies must produce
Many subsidies have few if any requirements companies must meet to qualify for aid. Although some subsidy programs are targeted at the neediest areas, certain types of businesses, or industries that an area hopes to attract, many subsidies are handed out with little thought given to whether the project is the best use of taxpayer money or offers the greatest benefits to communities. The result can be taxpayers paying to promote poverty-wage jobs and sprawl. Subsidy programs that do have requirements often lack the legal teeth (known as clawback provisions) to stop payments or demand refunds of subsidies paid in the event that a company fails to live up to its commitments.
3. Company commitments are often poorly monitored and enforced
Requiring companies to meet certain standards to qualify for subsidies does nothing if a company's compliance with the agreement is not monitored and enforced. Many jurisdictions never check up to make sure that development projects create the jobs, pay the wages, or meet the environmental standards or investment requirements they agreed to as a condition of a subsidy. When a company is found to be noncompliant, officials are often reluctant to enforce penalties, fearing that they will be cast as "anti-business."
4. Subsidies come with hidden costs
Tax expenditures -- uncollected income, sales, and property taxes -- are generally the largest subsidies companies receive. Very few jurisdictions figure out how much a subsidy deal is actually worth, or track how much they are spending on subsidies in their budgets. In addition, economic development subsidies can produce hidden taxpayer costs when subsidies are giving to companies that pay poverty-level wages. In those cases, taxpayers pay twice: once for the direct subsidy, and again for programs such as Medicaid, food stamps, and housing assistance that are funded through taxpayer dollars and are needed by a company's workers need to make ends meet.
5. The costs vs. benefits of subsidies to taxpayers are rarely analyzed
Public officials rarely evaluate the actual outcomes of projects against their projected impact on an area's development. In addition to getting hard figures on the costs of subsidies and better monitoring of compliance as discussed above, development officials need to assess whether the larger expectations of the project -- such as the creation of multiplier effect jobs or the attraction of other new firms to the area -- pan out. Even with that information, however, it can be hard to say what new development, including the subsidized project itself, would not have happened "but for" the subsidy, and which would have gone ahead regardless.
6. Subsidies often go to companies that would have built there anyway
Subsidies are increasingly treated as entitlements rather than enticements, both by companies shopping for the best deal and by governments trained to reach for their checkbooks at the rumor of a corporate relocation. Companies such as Boeing, Marriott, and Sears all spurred bidding frenzies by putting out relocation feelers, and then collected millions in tax breaks for staying put. In reality, location decisions rarely hinge on subsidies. Business basics -- proximity to markets, availability of labor, quality of infrastructure, quality of life, etc. -- determine where companies move. It is public goods that benefit all employers that are the key to a good business climate, although a company is never going to turn down free money. Spending for economic development is best directed to education, skills, and infrastructure, not expensive, company-specific subsidy giveaways.
7. Subsidies divert money from public goods
Money not collected through tax breaks would otherwise go to fund roads, schools, fire departments, and other public services that benefit all citizens and businesses. New development in an area increases the demand for such services. When large corporations avoid paying their fair share, the burden gets shifted onto working families and small businesses. The rest of us pay more, or the quality of our public services declines, or usually some of both.
8. Subsidies put local businesses at a disadvantage
Subsidies are disproportionately handed out to large companies moving into an area from out of state, giving them advantages that long-standing, existing businesses don't get. Fiscal conservatives, free-traders, and libertarians often oppose subsidies on the grounds that they interfere with the market, giving government-aided preference to one group over another. Small business owners bear the brunt of the impact of this unfair competition. These companies may have long histories as community members and taxpayers, but it is the big corporations new to the area that get special breaks. The situation gets even uglier when governments subsidize large retailers such as Wal-Mart. In those cases, multi-national big-box giants receive taxpayer aid to open stores that compete directly with local merchants.
9. Subsidies promote an economic "war among the states"
Subsidies also fuel competition among state and local governments looking to attract large companies to their regions. Companies are experts at playing jurisdictions off one another, often with the help of professional site location consultants, who work to create bidding wars that up the size of subsidy offers (and the size of the commission the consultants receive). The result is a race to the bottom that benefits no one but the companies. Many public officials realize this and want to stop offering subsidies altogether, but fear that they will be left at a competitive disadvantage.
Are development subsidies ever a good idea?
Some subsidy critics call for an outright end to the practice of subsidizing companies, while others call for greater community participation, stricter standards, and stronger safeguards when awarding subsidies. Good Jobs First and a growing number of community-based organizations take the latter view. It's unlikely that the practice of handing out subsidies will be done away with anytime soon, but it is possible to reform the practices of how subsidies are awarded and what standards those projects are held to.
In some cases, subsidies should be done away with altogether. Subsidies to retail are a prime example. Retail stores are not economic development. Opening another store does not increase demand for goods; it just gives existing consumers another place to shop, moving retail dollars around. Except in the rare instance where there is a true retail dearth (a low-income neighborhood without a grocery store, for instance), retail should be built without taxpayer aid.
In other cases, safeguards must be added to hold the providers and the recipients of subsidies accountable for creating family-wage jobs and providing other benefits for communities.
What is "accountability" and why does it matter?
Accountability means getting promises in writing and making developers and public officials stick to them. Accountable development, in contrast to the unaccountable development practices described above, is characterized by transparency of and public participation in the processes of crafting, monitoring, and enforcing development agreements. When taxpayer money is used for something that is supposed to be for the public good, it is imperative that the process be public and inclusive of local communities.
Accountable economic development is the process of raising the standard of living for average working people and improving the quality of life for area residents. Accountable development gives local residents a say in how their communities are redeveloped. Rather than vague promises of "jobs, jobs, jobs," development agreements negotiated through accountable development practices yield concrete, enforceable benefits that address local needs. They create quality jobs that pay a family-wage, provide health benefits, offer training and advancement opportunities, and are accessible to local job-seekers.
What can be done to make subsidized developments more accountable?
Communities across the country have won accountability reforms that give them a greater say in development decisions and target subsidies to companies that produce the greatest benefits for local residents. Community, labor, and religious groups have organized coalitions to stop or amend bad company-specific deals and push for legislative reforms that, when passed at the state or local level, apply to all subsidies granted by that jurisdiction.
Reforms are needed in all phases of the economic development process, from planning how to target subsidies, to the application and award process, to setting and monitoring the standards that subsidized companies must meet. Specific reforms include:
Disclosure laws - require states to compile and report information on subsidized companies, and allow public access to records such as which companies are applying for subsidies, the amount and type of subsidies companies have received, and whether companies are in compliance with their obligations under the subsidy agreement.
Clawback (or recapture) provisions - stipulate that if a company does not comply with the terms of its agreement (for instance, creating the promised number of jobs or paying certain wages), it must refund all or a portion of the subsidy it received.
Job quality standards - require subsidized companies to pay above a certain wage, provide health benefits, or offer other benefits such as sick leave or retirement packages.
Protecting education from tax giveaways - shield school funding by barring cities from abating the school portion of property taxes or by giving school boards veto power over subsidies.
Increasing accountability in the subsidy approval process - through mandatory public hearings and requiring votes on subsidies by elected officials.
Keeping state tax policy out of the subsidy debate - ensure that states maintain or adopt corporate income tax formulas that require companies to pay their fair share.
Negotiating community benefits agreements - contracts between developers and community coalitions that lay out a set of tangible benefits a development will create to meet the needs of local residents.
Targeting subsidies to promote smart growth - tie subsidies to public transit, deny subsidies to retail, and institute affordable housing requirements for subsidized developments.
All of these reforms are a matter of effective community organizing, as well as good policy. A disclosure law or community benefits agreement is only as strong as the coalition that won it. Without continuous citizen involvement in holding developers and public officials accountable, there is no guarantee that they will follow through on their promises.
For more information on these accountable development reforms, see Key Reforms section.
How can I research development deals in my area?
Uncovering the details of a particular development deal is often a challenge for researchers because subsidy data is a gray area--not completely public but not entirely confidential. There is no central source for subsidy data even within a particular city or state, so researching most deals involves contacting an array of government agencies. The information you need to understand a deal is typically not readily available to the public, but can usually be unearthed with persistence.
A good first source for subsidy information is the local newspaper, which will sometimes list the key players of the deal, the subsidies received, and the job creation figures and other benefits, if any, that the company promised. Media coverage of deals can be sketchy at best, however, so don't be disappointed if you don't find much there. The websites and press offices of local governments should be another early stop, where you may find press releases announcing the details of a deal.
Once you've exhausted those sources, it's time to contact the government departments and agencies that handled the subsidy negotiations and implementation. There is no consistency among the 50 states and countless local authorities when it comes to what agencies administer subsidy programs or what types of subsidies are offered, requiring researchers to learn the bureaucratic and legal landscape anew for every deal researched in a different region. There are also sometimes distinctions between the department that awards a subsidy and the department responsible for monitoring and enforcing compliance. Tracking down the right person to talk can require multiple attempts.
Then there is the data itself. Oftentimes, monitoring of subsidy awards and company compliance is so poor that no records are kept at all. Other times, there are questions as to whether the records are subject to Freedom of Information Act (FOIA) (public records) requests. Quasi-governmental Development Authorities are somewhere between public and private entities, and may try to refuse to provide any information. Governmental departments typically can provide documents such as the development agreement, but other documents, such as corporate income tax returns, are kept confidential. Persistence pays off here as well, however, as some information may be hard to locate and obtain simply because no one has ever asked for it before.
For a step-by-step guide to conducting subsidy research, see the Researcher’s Guide.
If you get stuck, you can always contact Good Jobs First for assistance.