We’ve been fielding more questions about cost-benefit analyses and ways to think about return on investment for incentive programs. In response, we are sharing one of our most popular articles on the topic.
Figuring out if an incentives package is a good deal for your community is not always easy. This post summarizes the three steps economic development organizations should take when conducting a cost-benefit analysis to determine whether an incentive deal is likely to generate net benefits for their community.
Economic developers should be able to summarize the benefits of a proposed project to the community in a few simple sentences. Opportunities are not “good” just because they exist. It is important to articulate why a proposed project is a worthwhile investment and how it fits the community’s economic development strategy.
In addition to explaining what the project is, the typical project benefits include number of jobs, quality of jobs and expected wages, total investment, and location (where the project will be and where the benefits will occur). Other important factors include the project’s timing (when it will begin, when the investment and hiring will occur, and the expected lifespan) as well as the level of risk/likelihood of success.
The tax and budgetary implications of incentive decisions for state and local governments should be analyzed to determine how taxes anticipated to be generated will compare to the expected cost of the incentive and any additional costs of service required by the proposed project.
Timing of expenses and anticipated revenues is important, as is the timeframe over which both will occur. Fiscal impact analyses should clearly explain who will be paying taxes (new residents? the company?) and whether the estimates are based only on the new jobs created directly by the project or also include indirect and induced job counts.
Many communities run economic impact models to trace the flow of money throughout the economy after the initial investment and estimate the contribution of that investment to the wider economy. Unfortunately, model output is often presented as fact and may even be the only data shared with the public and elected officials on the “performance” of the incentive agreement. Economic impact reports should be used carefully as a decision-making tool, with clear delineation of direct versus indirect and induced effects. It should be made clear that these are modeled impacts, not actual impacts.
One objective of these different levels of review is to determine whether an incentive deal can generate net benefits for a community. Whether it will or not is another matter and depends on the company’s ability to achieve its goals, the performance agreement, and many market and economic factors beyond the control of either party.
A second objective is to be able to explain why a deal is good (or not good) for the community. Establishing a clear, consistent process with solid analysis to guide decision-making makes it easier to communicate with stakeholders and build support for promising projects — and to steer away from bad ones.