Some experts predict state budget shortfalls could exceed half of a trillion dollars in less than three full fiscal years due to the pandemic’s fallout. These shortfalls could be deeper than those seen in the two previous U.S. recessions. This enormous sum does not account for additional shortfalls local/tribal governments and the U.S. territories face.

While predictions vary, there is no disagreement state and local governments will face fiscal challenges for years to come. So, what should governments do?

Many states and municipalities will set their annual or biennial budgets in the coming months. Beyond securing public health and safety, the next priority for elected officials will be regaining fiscal stability. Without good leadership, the kneejerk reaction is to drastically cut programs and services.

Too often, political environments position issues as all or nothing. For states and communities to rebound successfully, they must shed that thinking to welcome the reality that two things can—and must—be true at the same time. To reverse a decline, reductions alone are not a solution; elected leaders must also pursue growth.

Governments should certainly seek out efficiencies and look for ways to reduce costs as fiscal stability—or current and projected tax rates—of state and local governments greatly impact whether a location is attractive to businesses. But tax revenue growth is an equally important part of the equation. Job creation and new business investments generate new revenue across many tax streams: sales, payroll, property, income, etc. Elected officials must chart a path forward that is both fiscally responsible and focused on growth.

Additionally, elected leaders should always evaluate their economic incentives programs; 2020 certainly demands it. But restricting incentive offerings too severely will significantly limit a location’s ability to grow its way out of this mess. Governments should maintain—if not increase—performance-based incentives, especially those that fund themselves out of new revenues generated by specific investment/jobs. When used appropriately, these incentives drive new growth, create new tax revenues, help budgets heal, and rebuild surpluses.

While incentives are and will remain pivotal to economic development, the ecosystem which attracts and promotes business growth is vast. To stimulate new investment and job growth, elected officials must continue investing in the myriad programs, agencies and personnel designed for these purposes. Government can continue to achieve this through direct public investment and public-private partnerships. Specifically, elected leaders must sustain resource commitments across state and local government to infrastructure, entrepreneurship, and workforce training. Maintaining or doubling down on investments in these key areas, along with incentives and fiscal stability discussed above, is the recipe for growth.

Thinking about recent social justice efforts, driving inclusion and equity through economic development has not always been a priority. It should be and it is part of the ecosystem that must be resourced properly by government. Connecting more of the population to the benefits of jobs and investment is not only economically wise for a community, it is simply the right thing to do.

Assuming the core components of economic development will always be there is a dangerous mentality, especially given all this year has dealt. Every program, initiative, fund, or other function of the ecosystem in which the public has a financial stake will be challenged. It will take smart and effective public and private leadership to ensure states and communities maintain the tools that are necessary to grow out of this recession.

The historic events of this year have created an enormous challenge, and there is no quick and easy solution. State and local leadership will determine our success. In good times and bad over many decades, the best leaders found the sweet spot of fiscal responsibility and an attractive business ecosystem. It can be done, but only by rejecting absolutes and instead embracing the power of “and”—state and local governments must do two things well at the same time.

Jacob Everett is a consultant for McGuire Sponsel, a national advisory firm assisting CPA firms and businesses on specialty tax solutions and economic development credits and incentives. Everett advises growing companies on their investment, location and job creation strategies. You can email Jacob here.

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