As we work with economic development groups, elected officials and other community leaders across the country, we have picked up a few lessons on how to use economic development incentives more effectively.  Here are 6 steps you can take to make incentives work better for your community.

  1. Define the goal of each incentive clearly.   This is a surprising gap in many incentive programs. You can’t tell if it is working if you don’t know what it is supposed to achieve.

  2. Review your entire portfolio of incentive programs to understand risks, costs and to make sure it is aligned with your overall economic development strategy.  Make adjustments and rebalance as necessary.

  3. Conduct background research on incentive applicants. This is especially important for small firms and start-ups that are increasingly the focus of many incentive policies. The more you know about a company, the better deal you can create for both the business and your community.

  4. Perform due diligence on the deal.  An incentive deal is an investment for the community.  As with any investment, a lot can go wrong. Due diligence can strengthen your hand during negotiations and lead to better outcomes.

  5. Conduct an “ROI” analysis for your community by considering how well the project fits your strategy, the fiscal implications, and the potential economic impact.  It may seem expensive, but it is worthwhile to devote some resources upfront to make better decisions and communicate the rationale for those decisions to stakeholders.

  6. Track performance.  Monitor and report on compliance with performance agreements.  Economic development organizations need resources to manage and monitor incentives, as well as to enforce contract provisions when necessary, not just make the awards.

Incentives have become big business.  As their use has expanded, they are no longer just deal-winning tools to be deployed occasionally but sophisticated finance mechanisms used to support many types of economic activities. The best economic developers are also using more sophisticated methods to determine how and when to use these incentives effectively.  

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