Probably the most controversial part of economic development is the use of grants, loans and tax incentives by government to entice companies to invest their money in a specific jurisdiction. I had another conversation this week with a guy who was adamant that “not one single penny” should be used to foster economic development. “We shouldn’t be picking winners or losers” or something (how’s that working out for you, Mr. PM?).
I have said it before and I’ll say it again. Incentives are normally not a make or break issue with good economic development projects. The GM bailout is a widely absurd example and actually stirs great debate among economic development professionals many of whom believe that the huge sum of money could have been better used to promote economic development in other industries.
For example, the auto manufacturers in the southern US (Kentucky, Alabama, etc.) received something like $200 million in ‘incentives’ (mostly tax breaks – not much cash in US deals other than industrial revenue bonds) but this money is spread over 20-25 years (in tax breaks). So it ends up being up to $10 million per year on a project with a $2 billion upfront investment and $400 million per year in annual operating costs. Sure it’s a big number but if you use my ROI model, this is a no brainer. The state and local governments will receive far more incremental tax revenue off the workers in that plant than anything they ‘forgo’ in corporate taxes. In addition, they were never going to get those corporate taxes anyway if the firm located in Missouri.
In New Brunswick, there are many deals that gave the province a great ROI as well.
Saying that companies make major business investment decisions based solely on government grants or tax incentives is like saying that people will buy a new car because of a $1,000 cash back or some other incentive program. This is obviously ridiculous. The $1,000 is an additional inducement but anyone that would shell out $30,000 (and with financing costs $45,000) with the main reason being to get $1,000 up front would be crazy.
I think that very small firms looking for government grants – may be looking for cash flow and without it they couldn’t expand but for larger projects, where companies put in several million or more of their own investment, how could a small portion of that from government be the deal breaker?
We need to limit the temptation to be ideological about it. Our competitors are offering a wide range of incentive programs to encourage economic development in targeted sectors. We need to be in the game – but only with programs that demostrate good economic value for taxpayer dollars (or forgone taxes in the case of tax breaks).