Are Tax Incentives an Economic Development Answer?

Posted: Updated:

Economic development deals are in the news all the time. As companies announce expansions or headquarter relocations, the media is rife with details about incentives offered to secure these projects.

Some argue that these incentives would not be necessary if governments did not compete against one another for projects. But the fact is, competition does exist. As a result, cities and states without an effective toolkit of incentives at their disposal are at disadvantage.

One regular criticism against the use of incentives is that the so-called benefits of economic development projects don’t outweigh the cost in lost tax revenue. In fact, many state and local governments use a return-on-investment calculation to determine whether a company even qualifies for incentives. For those businesses that are offered incentives, the ROI analysis often drives the level and types of incentives offered.

Another fact often ignored by detractors is that hundreds of companies are turned away every year for participation in these programs. Indiana, like most states, requires a project to meet a "but-for" test before incentives can be offered: But for the incentives being provided to the project, the company would not locate or expand its business in the state. This requirement makes state incentives unavailable to many projects and industries.

Some economic development projects receive incentives that are not competitive in the traditional sense of one state competing against another. For example, tax increment finance, or TIF, is a local program that uses future property tax revenues on projects to offset capital costs. These projects often occur at redevelopment sites that have cost-prohibitive infrastructure needs. In such instances, the deciding factor in utilizing incentives is not a traditional but-for test. Rather, the question is whether the project can move forward without the use of incentives to reduce the higher costs of developing the site.

Because the benefit of programs such as TIF is often paid upfront, the scrutiny to approve their use is greater. That said, upfront incentives programs are more the exception than the rule in Indiana. Most state-level incentives programs are performance-based. This means that the incentives are not paid out until the companies create the jobs and/or makes the anticipated investment.

A final criticism levied against economic development programs is that tax credits and other benefits are paid to companies that eventually move their operations outside the state. In most states, protections are put into place to penalize such companies. For example, Indiana’s economic development agency, the Indiana Economic Development Corp., enters into incentives contracts that require companies to file reports on an annual basis, verifying their compliance with the terms of these contracts. If a company has received incentives and subsequently leaves the state while the deal is still active, the IEDC has the ability to claw back those incentives, a practice it enforces consistently and aggressively.

Despite the various controls in place, not every deal goes as planned. The projects that go south are often the ones that receive the lion’s share of the attention in the media and from critics. But if Indiana is going to continue to vie for economic development projects, incentives are a vital part of remaining competitive. By taking steps to mitigate or eliminate its risks in providing incentives, Indiana is able to enhance its stewardship of taxpayer dollars while directing the cost/benefit analysis of using incentives decidedly in its favor.

Tim Cook is Chief Executive Officer and Katie Culp is president of KSM Location Advisors.

  • Perspectives

    • Planning For Expansion or Relocation in 2019?

      Given the strength of today’s economy, business relocations and expansions that were once few and far between are now much more common. Businesses considering significant investments or relocations in 2019 will consider the cost and availability of workforce, logistics, cost of short- and long-term occupancy, and much more when looking for the ideal project site. There needs to be a good community fit as well. While these are all critically important factors to the success of a...
    More

Subscribe

Name:
Company Name:
Email:
Confirm Email:
HTML
INside Edge
Morning Briefing
BigWigs & New Gigs
Life Sciences Indiana
Indiana Connections
INPower
Subscribe
Unsubscribe

Events



  • Most Popular Stories

    • Indy Airport to Introduce New Airline

      Indianapolis International Airport will today host an event to welcome a new airline. Airport officials say the provider will add more routes to IND's growing roster of options. Earlier this month, the airport reported record-breaking traffic in the third quarter. IND said the more than 2.4 million passengers that passed through the airport in the third quarter of 2018 marked an 8 percent year-to-date increase over last year and the best third quarter in the facility's history.

    • Indiana Companies Among 'Just 100'

      Three Indiana-based companies are including in Forbes' 2019 "Just 100" list. The ranking, according to the publication, features companies that are "taking the public interest into their own hands and generating better returns for themselves and society in the process." 

    • IND Adds New Airline, Nonstop Routes

      A Florida-based airline, billing itself as an "ultra low-cost carrier," is coming to Indianapolis International Airport. Spirit Airlines Inc. (NYSE: SAVE) will begin daily, nonstop service to Las Vegas and Orlando in March, and add summer seasonal nonstop service to Myrtle Beach in May. Vice President For Capacity Planning Mark Kopczak says the airline sees "real potential for growth" in those routes, adding IND has done a good job "selling Indy as a place...

    • State to Announce 'Stellar' Winners

      The Indiana Office of Community and Rural Affairs will Tuesday announce the 2018 winners of the Stellar Communities Designation Program. This is the first year the program is operating on a regional level and two Indiana regions will receive the designation. 

    • Drury Hotels Adding to Indy Footprint

      Missouri-based Drury Development Corp. is looking to add to its portfolio in Indianapolis. The company plans to invest $13 million to build a seven-story, 180-room hotel on the city's northwest side by 2022 and add 30 jobs.