The New Economic Development Paradigm
Jobs, jobs, jobs. That's been the motto of politicians and economic developers for as long as most of us can remember. The value of any potential project can be measured in a number of ways, but the ultimate value has historically been tied closely to job creation.
In Indiana, tax abatements are offered based on plans for creating new jobs. The Indiana Economic Development Corporation offers valuable tax credits for companies looking to add to their workforce. These credits and others across the country are frequently tied to the jobs that will result from such investments. The ultimate endgame, whether at the local, state or national level, has been the creation of sustainable, fair-paying jobs.
For years, this approach served state and municipalities well, but it could soon become obsolete as we enter a new economic reality.
In many areas, true unemployment is rapidly approaching zero. Many businesses seeking to add employees simply can’t find the available (or qualified) workforce. At the same time, technology and tax reform are accelerating a move toward automation in all industries. Distribution and data centers are also changing the game as these operations frequently involve significant investment – and a significant economic impact – without creating mass numbers of new jobs.
Private investment is already adjusting to this market reality. In lieu of workforce additions, companies are investing in ways to increase production with the same number of workers. Businesses with an agile, highly skilled workforce remain competitive now and well-positioned for the future.
Meanwhile, on the public side, states and municipalities are still judging success based mostly on job generation. Even with virtually no unemployment, current programs favor and incentivize projects that add jobs over programs that improve jobs.
So, how can Indiana and other states modify credits and incentives to reflect this new paradigm? The first step is to change the way economic development value is measured in an economy with virtual full employment. Municipalities and states must adjust their scorecards to ensure future prosperity.
In Indiana, our leaders could get ahead of this curve with a few simple policy changes:
Reward better jobs, not just more jobs. Give equal consideration and importance to investments intended to increase wages, not just those that seek to add jobs. For instance, Indiana’s Economic Development for a Growing Economy (EDGE) tax credit should reward job improvement, not just job creation.
Invest heavily in training. The new workforce must be more skilled. The faster Indiana and our communities can improve and increase workforce skills, the more appealing we will be to private businesses. Our state’s Skills Enhancement Fund should be strengthened, not eliminated, and the Next Level Jobs program ought to be continued and enhanced.
Reduce tax burdens on machinery and automation. Tax abatements are typically phased and short term. Businesses requiring significant capital investment in machinery prefer long-term homes that will not punish them for their investment. Longer-term abatements, particularly for investments in real personal property, will help Indiana compete with other states, many of which do not tax this equipment at all.
Reward investment that brings value. New construction and equipment can bring economic value far beyond added jobs. Higher wages, higher property values, new property taxes, increased populations and other indirect benefits increase state and municipal revenues while improving overall quality of life. An easy update could make the Hoosier Business Investment (HBI) Tax Credit and Industrial Recovery Tax Credit (IRTC) available for projects that produce economic value, even without job creation.
With Indiana’s historically low unemployment, we must change the ways we keep score and the projects we seek to attract. In addition to new jobs, higher wages and strategic investments must become priorities. Competing in the new economic paradigm will require changes at both the legislative and executive levels, and Indiana must adjust to continue its position as a national economic development leader.
Steve Brunson is a principal at Indianapolis-based McGuire Sponsel, a specialty tax and advisory firm.