Incentives as a Public Investment

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Jonathan Morgan

Jonathan Morgan is a School of Government faculty member.

State and local governments are getting smarter about how they use financial and tax incentives to support economic development. As incentive deals face greater scrutiny, public officials can take a number of steps to ensure that they are: 1) getting the best returns on the investment of public dollars, and 2) minimizing any downside risks associated with the deals. 

The International Economic Development Council (IEDC) recently released a report that provides a framework for using incentives as a prudent public investment. The report, titled “Seeding Growth: Maximizing the Return on Incentives”, discusses best practices in designing incentive programs and managing “incentives portfolios”. These best practices include strategic planning, regional incentive pacts, non-financial incentives, program monitoring, eligibility and investment criteria, performance metrics, incentive agreements, and shareholder communication. A part of the report that I found particularly useful is the identification of commonly used investment criteria:

• Minimum private investment
• Requirements for on-site business activity
• Local purchasing requirements
• Caps on public investment per new job created
• Wage standards
• Job quality standards (hours and benefits)
• Hiring targets for local residents, minorities, women, youth, displaced workers, etc.
• Time requirements staying at site
• Requirements for corporate financial condition and performance
• Expectations for payback period and ROI

The IEDC report emphasizes the importance of using analytical tools to calculate the return on investment (ROI) for incentive deals. Among many sources, it cites an article I wrote that discusses various approaches to conducting economic and fiscal impact analyses, and it also includes a brief mention of social return on investment analysis. In calculating ROI, the IEDC report argues that effort should be made to determine how much of the proposed private investment can be attributed directly to the public dollars to be invested in the deal. It acknowledges the difficulty of establishing that the private investment would not occur “but for” the public incentives provided.

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