Industrial Incentives: Competition Among American States and Cities.
In recent years, a debate has been taking place among economic development professionals and elected officials about the use of incentives to entice companies into a community. Some States and cities have been willing to give a large amount of dollars to companies to persuade them to relocate. The Mercedes-Benz plant in Alabama is an often cited example (the authors use it as well). Companies are taking advantage of the incentive game played by the States and cities and expect a benefit from relocating.
Incentives can range from cash up-front to performance-based tax abatement, where companies will receive their benefit after showing that they hired the promised number of people. Incentives can also be given to a community for infrastructure improvements, such as the State of Florida Economic Development Transportation Fund (Road Fund), or to companies to train newly hired employees at a local educational institution (State of Florida's' Quick Response Training Program).
Because of the wide variety of incentives and types of programs that administer these incentives, it has been difficult to compare these incentives by States or cities, in particular their dollar-value benefit. If comparisons are made, it is usually done by looking at the number of incentives offered by a State or city, or when possible, the type of incentive. Looking at the actual benefits generated by incentives has hardly been researched.
Fisher and Peters, in their book, Industrial Incentives: Competition Among American States and Cities, developed the Tax and Incentives Model to compare States' and cities' incentive programs by focusing on the financial benefits generated by incentives. These authors chose 24 States that have the highest level of manufacturing in the United States. Then they randomly picked 112 cities with 10,000 population or more in these 24 States. The Tax and Incentives Model was applied to these States and cities.
The Tax and Incentives Model uses the hypothetical firm method to assess the incentive benefits. The hypothetical firm method entails the creation of fictitious companies for several manufacturing industries, including data for financial statements. The authors use this method to avoid the shortcomings of other methods used to compare incentives, such as aggregate measures of State tax levels for counting incentive programs. The latter is often difficult because many incentives might seem similar or have similar names, but are administered differently and, therefore, a company would not receive the same benefit from similar incentives, making comparisons difficult. In addition, the model takes a longer view when applying the incentives to the hypothetical companies by looking at past and future revenues and taxes paid (property and sales taxes). This is something usually not done in other models.
The authors go to great length to outline the different incentives and how they fit in the model. Some incentives are so specific to a particular community or are available to any community, such as the Community Development Bloc Grants, that there is no difference in benefit and, thus, were not included in the model. Once they established the types of incentives to use in the model, they apply the collected data from the States and cities chosen.
One of the findings of Fisher and Peters, after collecting and analyzing the data on the 24 States and 112 cities, is that high-tax States and cities do not necessarily have the highest incentives available. Another finding is that there are great differences among States and cities in the tax burdens they pose on companies and the incentives they offer. These differences seem to be large enough to cause clear (re)location decisions. The authors also examine the relation between incentives, taxes, and unemployment levels in States and cities. The data showed that States with low unemployment levels often offer low incentives and could have high taxes. The correlation between level of taxes and incentives offered and the unemployment levels are in most instances very weak. Both cities with high unemployment and low unemployment might gain new jobs through their incentives. Fisher and Peters show through their model that incentives do not cause redistribution of jobs; in other words, incentives in high-unemployment areas might not attract new companies and incentives in low unemployment areas might attract new companies and jobs, even though there is no urgent need for additional jobs.
With the results of the Tax and Incentives Model, the authors examine the policy implications of the effectiveness of incentives and in many cases the lack thereof. After looking at the 24 States and 1.12 cities regarding the incentives offered and the return on investment, Fisher and Peters conclude that most of these States and cities fall in the middle group and therefore, other factors, such as labor cost, quality of life, and labor force skills, could be the deciding reason for a location or relocation. The authors are aware of the fact that other factors often play an important role in the location decision of the company. Some of these are very difficult to quantify and these types of factors are not included in the Tax and Incentives Model. An example is the location preference of the company's CEO because he or she would like to live in that location. This concluding chapter gives an overview of the policy debate in the United States regarding incentives and the possible solutions brought forward by economists, such as reducing the use of Federal money for incentives. The authors do not give clear suggestions, realizing that incentives are given at different levels and that no community using incentives in attracting companies wants to be the first to end the use of incentives in economic development. The debate will continue. The book's importance in this debate is that it attempts to clarify and demystify the use of incentives by analyzing the availability and benefits of incentives in a scientific manner.
Jaap Donath Manager, Business Research The Becon Council
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|Publication:||Monthly Labor Review|
|Article Type:||Book Review|
|Date:||Mar 1, 1999|
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