Incentives aren’t just for business attraction but are also often used to help distressed communities and connect residents to quality economic opportunities. Here are a few approaches:
Enterprise zones typically include a variety of tax incentives to encourage investment and create economic opportunities in designated neighborhoods.
Unfortunately, the track record for enterprise zones suggests they do not accomplish their goals. For example, we have written about California’s decision to end its enterprise zone program, noting that it failed to target the state’s most distressed areas and did not generate new employment opportunities for individuals in need. Pennsylvania’s Keystone Opportunity Zone program also reported disappointing results, with few new jobs created and tax credits going largely to existing businesses, many of which had no employees at all. Maryland’s 2014 study of enterprise zone tax credits concluded that the credits “are not effective in creating employment opportunities for enterprise zone residents” and the zones are “failing to attract many businesses.”
New Markets Tax Credit
The federal New Markets Tax Credit program (NMTC) is also designed to encourage investment in distressed or low-income communities. It is generally considered effective in doing so while also yielding meaningful job creation and adding to the tax base. It is not clear that low-income individuals are the beneficiaries, however, and more research is needed on this topic. We’ve written about the NMTC program here and here.
The Community Investment Tax Credit program in Massachusetts looks similar in mission by encouraging investors to contribute to qualified community development corporations, which “partner with nonprofit, public and private entities to improve economic opportunities for low- and moderate-income households and other residents in urban, rural and suburban communities across the Commonwealth.”
A recent report found that the majority of donors were individuals, although corporations and other entities are also eligible. This is important because some NMTC evaluations have found that while total institutional investment did not increase (it was redirected) as a result of the tax credit, individual investment did increase – which means new investment was generated that would not have happened otherwise.
Impact investments are made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return. Impact investors are increasingly joining forces with community development finance organizations because the latter have the expertise to deploy capital successfully in communities.
Community development finance is intended to foster job creation and economic growth through the use of tax-exempt and other public-private partnership finance programs. It might include tax increment financing (TIF), brownfields financing, bond finance, and loan fund programs, among others, and has much in common with economic development incentive programs.
The challenge will be to expand beyond real estate investments and:
redirect this dynamic, flexible model and capitalize on research and new models in child development, health, education, and employment support. Moreover, problem-solvers need to look beyond the neighborhood, linking to regional economies, regional labor markets, and education and training resources located outside of cities. . . . Intermediaries like the Local Initiatives Support Corporation (LISC) and Enterprise Community Partners will need to diversify the skill sets and tactics that have successfully created pathways for productive investment in housing and commercial development. (Grogan 2012)
Sustainability and the triple bottom line
Equity issues are part of sustainability and triple bottom line rubrics for economic development. These rubrics include aligning incentives with broader social and economic priorities in communities. For example, we have previously described how almost every state and many localities use incentives to address equity issues in their communities by offering special tax breaks or other financial inducements to invest in distressed neighborhoods, hire specific categories of unemployed or underemployed workers, or provide workforce training to raise individual skill levels to lead to better job opportunities.