115662407-lessons-learned-from-recent-state-finance-and-incentive-program-review

A Center for Regional Economic Competitiveness (CREC) team, including staff and senior fellows, recently concluded a review of state financing and incentive programs for the Maryland Economic Development Commission and the Maryland Department of Commerce. Thanks to guest blogger Catherine Renault for this project summary.

Lessons learned

1. This sort of review is helpful on a regular basis. Since so many incentive and financing program portfolios are developed piecemeal by legislative initiatives and successive administrations, they rarely represent a strategic, holistic approach to economic development. An outside look can be an asset to clearly understand what your target audience sees across your program portfolio.
2. While most programs are likely operating well, they can also benefit from administrative, and occasionally, statutory improvements that can tighten them up and focus them more tightly on strategic objectives, including customer service. Over time, even well crafted programs can become outdated or overextended.
3. Some great programs are woefully underfunded, while others suffer from glaring errors in statute that greatly decrease their effectiveness. While staff is likely aware of these deficiencies, an outside opinion is sometimes helpful bringing these issues out into the open.
4. Annual reports and detailed record keeping on these programs greatly decreases the funding required for a review, because most of the data is on hand. On the other hand, gathering data, especially from companies that received assistance in the past, is very difficult, and can hamper efforts to fully understand a program’s impact and effectiveness.

Incentives for major projects 

Flexibility is the name of the game in deploying state incentives. In most recent cases of large corporate relocations or new facility openings, the winning location relied on a generous—and very flexible—incentive “package,” a mix of multiple benefits specifically customized to meet the corporate client’s needs, usually spread across several years. These benefits might include infrastructure or site-related investments, workforce training, tax breaks, and grants, which are drawn from a variety of state and local incentive programs and services. (Conducted by Dr. Ellen Harpel)

Incentives for enterprise zones 

The research literature finds that, in the right conditions, enterprise zone programs can and do help stimulate investment and create new jobs in distressed communities. However, their ability to offer new employment opportunities to the most disadvantaged residents of these communities has proved more limited.

One national trend we found was the use of uniform tiered systems of eligibility where more distressed communities can offer higher benefits to companies there. These tiers are consistent across all the programs, and greatly simplify the administration and marketing of the incentives. We found that guidelines for jobs created or investments can be aligned with a tiered structure so that they are realistic for the situation. (Conducted by Dr. Erik Pages)

Angel tax credits 

Currently, 26 states have 38 programs that are some version of angel or venture capital investment tax credits. The few studies of angel tax credits suggest that there is a positive correlation with entrepreneurial activity, and that the decisions of individual investors are influenced by the availability of the credits. However, design decisions made in the legislature and by program managers can dramatically impact the effectiveness of these credits. (Conducted by Dr. Catherine Renault)