The COVID-19 pandemic’s unexpected hit to the economy has required many businesses to completely rethink their future. Government officials, on both the state and local level, have an opportunity to help businesses and boost their communities’ financial outlooks through economic incentives. When used properly, incentives can spur investment and job creation, which will lead to an improved economy and prosperity across the socioeconomic spectrum.
At the government level, the fiscal fallout from the pandemic is also likely to be substantial. A sharp decrease in tax revenues and an expectation of mid- to long-term effects on income and property taxes adds to the stress. Officials focused on short-term budgetary restraints may call for a reduction in incentive programs and redirect those dollars to essential services. Those focused on long-term recovery may want to ramp up economic development efforts.
Both sides of the argument have a compelling case, but state and local officials must balance short-term budgetary needs with long-term goals to return to a period of sustained economic and revenue growth.
It is possible for officials to both boost economic development and ensure fiscal responsibility and liquidity. Here are four simple ideas for economic development while balancing the short- and long-term needs of state and local budgets.
Don’t Hit the Brakes
Even during a pandemic, workers seek gainful employment and dollars seek returns. If a city or state freezes incentive programs, investments and jobs will simply move elsewhere.
The demand for incentives is actually greater now than four months ago. Locations which remain competitive in difficult times will be years ahead down the road. Hitting the brakes on incentives will slam the brakes on your recovery.
Evaluate Incentives That Take Funds from the General Budget
Incentives can take many forms. Some incentives are front-loaded and directly impact state and local budgets, including cash grants and infrastructure investment to support private projects. While these incentives spur development, the dollars may no longer be available, and these programs may need to be furloughed.
Each community is different and will have different budgetary constraints. Those that can continue to invest will gain in the long-run, while cash-strapped municipalities should first address immediate budgetary realities.
Get Aggressive with Self-Funding Incentives
Many incentives provide a split of revenues directly created by a project. The construction of a new building leads to property tax revenue. The creation of new jobs brings income taxes and sales taxes from local spends.
Incentives that provide benefits from future revenue are some of the best and most responsible in the public toolbox. These incentives include job creation incentives, abatements, tax increment financing, sales tax sharing agreements and more. Generally, these incentives are a net positive to the government unit that provides them.
In a time where cash is tight, communities should increase focus on revenue-positive incentives.
Adjust Minimum Job and Wage Requirements
Most economic development programs aim to increase both employment and wages across all levels. As such, cities and states may have to meet minimum wage and job creation requirements to qualify for incentives. While these requirements are laudable and can help determine which projects are worthy of incentivizing, they also should represent current economic conditions.
When unemployment rates are low, governments can afford to be more selective. However, we currently face historically high unemployment rates, and returning employees to work takes priority. Existing programs should consider temporary, modified requirements to jumpstart the rehire process.
Incentives can be valuable tools, so long as they reflect the current economic reality. Present budget and program decisions will affect not only short-term budgets, but also the long-term prospects of our states and communities.
A balanced and responsible—yet proactive—approach can shorten our road forward to prosperity.
Steve Brunson is a principal for McGuire Sponsel, a national advisory firm assisting CPA firms and businesses on specialty tax solutions and economic development credits and incentives.