Editors note: Part 2 of 2. Find the first editorial in this series here .
Yesterday, we discussed how economic development incentives are most often a preposterously bad idea on a national and state level, giving public money to businesses that hold jobs for ransom, not because companies actually need such help.
University of Missouri political scientist Kenneth Thomas, who has spent most of his career studying incentives, put it this way in a recent interview: Weve just created a system where we pay them a lot of money to do something they would have done anyway.
But that was on the national and state level. What about locally? There, the situation is a bit different. As long as we dont particularly care about the costly effect such giveaways have on the state or the nation, incentives can actually make some difference on the city or county level. Those who study the practice have concluded that grants and tax breaks are at their most effective when companies are trying to decide between similar cities or metro areas. Its in this situation that incentives can sway decisions at least a bit, even if its at the expense of other areas in the state or region.
Here in Horry County, we have wholeheartedly embraced the idea. The Myrtle Beach Regional Economic Development Corp. prominently displays the incentives available to companies on its website. Earlier this year, the County Council voted to give the EDC wide latitude to award smaller, standard incentives to qualifying businesses without first obtaining council approval, speeding up the process considerably.
On Tuesday, Horry County Council will discuss again larger incentives for Project Blue, a business development that could bring more than 1,000 jobs to the Carolina Forest area. After recent leaks about the project, the council will also receive a briefing from local economic developers about the need for confidentiality in such negotiations, as they reinforce the worth of offering such inducements to prospective employers.
But though local incentives can be more effective than state or national programs, they still suffer from one major problem, as economic researchers Alan Peters and Peter Fisher explain:
The most fundamental problem is that many public officials appear to believe that they can influence the course of their state or local economies through incentives and subsidies to a degree far beyond anything supported by even the most optimistic evidence.
Even local incentives, while they might retain some influence, are often overhyped and under-scrutinized. Though they can be the deciding factor in a business location, researchers still say theyre only a vital component a fraction of the time. Thats why its so important to set strict limits and stringent accountability measures. Skepticism is a plus.
Local economic developers should be given credit for some worthwhile policies they have put in place. County incentives are targeted only toward companies that provide better-quality jobs meeting a specific wage level or which make a sizable capital investment (although in practice these rules been waived twice recently, somewhat nullifying their worth). Agreements also contain clawback provisions that will seek to reclaim the incentives if promised goals are not met (although these provisions are worth little if a business goes bankrupt). And economic impact studies are commissioned for each proposed project before incentives are considered. Nevertheless, there remain improvements to be made.
The impact studies, for example, calculate the payback period for any incentives based on projected increased tax collections resulting from more jobs. So if 100 jobs are created its assumed that those 100 new employees will mean more taxes collected by Horry County, which will pay for the incentives paid to the company. But theres no calculation of the increased services those new workers will require or of the effect that new tax breaks might have on the level of current services.
Thats a big unknown to be working with. Researcher Timothy Bartik points out that when employment increases in a region, studies have determined that about 8 out of 10 of the jobs will be filled by people moving into the area who would not have otherwise lived here. That increase in population will in turn mean a need for more government services that will extend the payback period.
Most companies are also never challenged, at least publicly, to justify why they actually need such incentives to locate in our area, an all-important question.
All of this information leads to one major conclusion. If economic development incentives have become a fact of life, we must at least be much more deliberate and thoughtful about how and when they are dished out.
We need to have a plan in place for checking that the agreements are actually working as we want them to. Did they actually produce the jobs that we thought they would? Did the predicted economic impact actually occur? If not, why not? We might consider a regular review schedule for routine incentives to ensure that theyre not forgotten. New agreements could be shorter, but extendable, after a review of progress.
We need to be asking the right questions before opening the public checkbook: Are we rewarding action that would have happened anyway? Can businesses certify that the incentives are the reason theyre locating here? Are these created jobs just displacing other jobs already here? How much will the new business cost in increased government services for its workers? Can the company be induced to first hire local workers or unemployed workers before pulling in new residents from elsewhere?
After their exhaustive review of incentive programs around the nation, economists Peters and Fisher concluded that the current system is broken. If not reformed, they warned, it will only perpetuate a an unending merry-go-round of tax cuts and subsidies that will starve government of what it needs to provide services. That may be just fine for the businesses getting on the merry-go-round. But it should be a concern for those of us paying to keep it moving.