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Reform incentives for economic development

Reform incentives for economic development

Metropolitan Chicago can thrive only to the extent that businesses operating here compete successfully in global and national markets. Businesses base their strategies on state and local conditions, which determine access to high quality inputs like talent, capital, infrastructure, and research. Economic development programs therefore seek to improve the region’s business environment and foster sophisticated ways of competing. Given limited public resources, communities are looking for strategies that can make a significant impact on their growth and prosperity.

 

The State of Illinois and many local governments offer financial incentives to subsidize revenue-generating development and attract or retain specific businesses. These incentives can take many forms like tax preferences, abatements, and credits; non-tax cash grants and loans; or other subsidies like infrastructure investments, training and education subsidies, fee waivers, and land write-downs. Businesses can capitalize on competition among neighboring states and localities while drawing on the same labor pool, supply chain, natural resources, and other assets that actually underpin their profitability. As a result, poorly coordinated or targeted economic development incentives result in public expenditures for limited economic gain.[1] Direct investment and financial incentives remain the prevailing way that many state and local governments seek to attract businesses. Yet this strategy is no match for the complex demands of economic growth and resilience, which depend on the formation and expansion of businesses native to the region.[2]

 

[GRAPHIC TO COME: An illustrated graphic will show the variety of factors that contribute to local economic development.]

 

Traditional economic development tactics are under more scrutiny as stakeholders explore enhancing the assets that represent our region's competitive advantage.[3] Strengthening the state and region’s human capital, infrastructure, fiscal conditions, and regulatory or tax systems could provide broader benefits to our business environment and resilience.

 

Performance-based approaches can help make the best use of limited resources by using data and stakeholder feedback to improve decision making. However, the State of Illinois and many local governments provide incentives without adequately monitoring their performance relative to planning and economic goals. Moreover, governments often structure these incentives as tax expenditures -- special exclusions, exemptions, deductions, or credits that may appear to lower tax revenues rather than increase spending. As a result, incentives often fall outside the scrutiny of a regular appropriations or budgeting process, where governments can otherwise weigh trade-offs and make transparent decisions to extend, improve, or terminate a particular incentive.

 

The state and local governments should prioritize public investments toward policies and programs that contribute meaningfully to the region’s economic competitiveness. Communities can make development decisions and investments that support regional and local goals, and research provides further insight into targeting how, where, and when to apply incentives effectively. Such instances may include projects that increase higher-wage employment, reinvest in infill sites, leverage existing infrastructure assets, remediate brownfields, or encourage mixed-use development.[4] Improving the use of economic development incentives will require the State of Illinois to take a stronger leadership role in aligning resources to ensure strategic planning and rigorous analysis.

 

The following describes strategies and associated actions to implement this recommendation.

Promulgate stronger standards for transparency and accountability of economic development incentives

Proper evaluation of any program relies on two essential components: clear, relevant, ascertainable data, and internal procedures to assess outcomes and make decisions. The transparency of data and information on economic development incentives varies across metropolitan Chicago. Public agencies collect and publish a significant amount of non-proprietary information regarding incentives, but these data systems are often inadequate to determine an investment's effectiveness. In particular, disclosure standards can differ by the unit of government and the type of incentive, leaving information too fragmented or inconsistent to determine the total incentives going to a project. Regularly evaluating and publishing incentive data allows communities to make prioritized investments in their economic growth and long-term sustainability. Rather than extending incentives into perpetuity, the State of Illinois and local governments should pursue performance-based approaches to make decisions that extend, improve, or terminate incentives based on rigorous analysis. Such analysis should account for the incentive’s full costs and benefits, progress in achieving its public purpose, and trade-offs relative to other government activities.

 

The State of Illinois and local governments should require a regular audit of all tax abatements, diversions, and credits for economic development.

 

The State of Illinois and local governments should implement and maintain sunset provisions on all tax abatements, diversions, and credits for economic development, allowing periodic reevaluation.

 

The State of Illinois and local governments should make comprehensive data on incentives for economic development available and ensure that relevant, accurate, non-proprietary data can be reliably located, integrated, and analyzed.

Align incentives with local and regional goals, anticipated outcomes, and tradeoffs

Most businesses choose their locations based primarily on workforce, access to transportation, quality of life, business environment, and other assets, giving much less weight to tax incentives.[5] In light of limited public funds, state and local jurisdictions should provide incentives only when a business relocation or retention would substantively advance local and regional goals related to quality of life and economic development. As CMAP research has shown, best practices exist for how, where, and when to apply incentives for maximum public benefit.[6] ON TO 2050 recommends the targeted use of incentives for developments that support regional economic goals, such as increasing employment in traded clusters, reinvesting in infill sites, or encouraging mixed-use development near transit. This strategy appears in the Prosperity and Community  chapters.

 

Local governments should establish criteria to ensure that economic development incentives fit with local and regional economic goals. The policies should maximize broad benefits and minimize the use of incentives that are only for fiscal gain to the community.

 

CMAP and partners such as ULI and MPC should provide best practices and model economic development incentive policies for communities.

 

Local governments should proactively establish economic development agreements with neighboring communities to reduce intraregional competition via incentives, and reduce public costs.

 

The State of Illinois and local governments should enhance data on tax credits and incentives provided at all levels of government and consistently evaluate the expenditures and outcomes of incentive programs such as sales tax rebates, EDGE, TIF, property tax abatements, Enterprise Zones, and others.

 

The State of Illinois should incorporate regional priorities into its strategic economic development planning and provide only assistance or incentives that align with those priorities.

Footnotes

[1] Nathan M. Jensen, “Job creation and firm-specific location incentives,” Journal for Public Policy 37,1 (2017).

[2] Robert G. Lynch, Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development, 2004, Washington, D.C.: Economic Policy Institute, https://www.epi.org/publication/books_rethinking_growth/.

[3] Chicago Metropolitan Agency for Planning report, “Examination of Local Economic Development Incentives in Northeastern Illinois,” 2013, http://www.cmap.illinois.gov/economy/tax-policy/economic-development-incentives. Chicago Metropolitan Agency for Planning ON TO 2050 strategy paper, “Tax Policies and Land Use Trends,” 2017, http://www.cmap.illinois.gov/onto2050/strategy-papers/tax-policy-land-use.

[4] Chicago Metropolitan Agency for Planning, Fiscal and Economic Impact Analysis of Local Development Decisions, 2014, http://www.cmap.illinois.gov/documents/10180/82875/Fiscal%20Econ%20Impacts%20Dev%20FINAL.pdf/6fc7ed1c-aba7-4d6a-a057-8d251aa7fbdc.

[5] Joseph M. Phillips and Ernest P. Goss, “The effect of state and local taxes on economic development: A meta-analysis.” Southern Economic Journal (1995): 320-333. Grant Thornton, The 10th Annual-Manufacturing Climates Study (1989): Chicago: Grant Thornton.

[6] Chicago Metropolitan Agency for Planning, Reorienting State and Regional Economic Development: Lessons Learned from National Examples, 2014, http://www.cmap.illinois.gov/documents/10180/229846/FY14-0061%20Economic%20Development%20Report.pdf/d5609fbc-5561-4ea9-a1c2-fb3dbbc8d74c.



 
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