8123433-how-and-why-we-use-incentives-challenging-some-assumptions

Should incentives be used primarily to sway a decision?  

A common assumption is that businesses should not be rewarded with incentives for something they would have done without the incentives.  This concept has been extended to suggest that incentives should only be used when businesses are considering a move to another location.  If businesses are merely planning to stay or grow where they are, they should not be rewarded.  But, if they threaten to move elsewhere, incentives would become appropriate.  

Economic developers in some communities make this an explicit part of their incentives policy. Limiting incentives to those cases where it changes business location decisions has also been suggested as a best practice.

Unfortunately, this “but for” assumption has several drawbacks.

• It encourages and then rewards companies that pit one location against another.
• It effectively penalizes businesses that do not wish to move to another location by making them ineligible for incentives while offering equivalent relocating businesses a financial advantage.
• It requires economic developers to make an impossible “but for” assessment on the incentive deal.  There is no practical way in most cases to determine that any given incentive truly was the deciding factor for a location choice

Further, while we want incentive decisions to be made on the basis of the good they create for our communities, the “but for” standard does not take economic value into account.  Instead it focuses attention on the deal, rather than community objectives.

The more I think about it, the more problematic the standard assumption seems.   Should the “but for” standard remain a best practice?

The implication is not that funds should be given to anyone who asks.  Communities should think carefully about what they hope to accomplish with their incentive policies and then scrutinize applicants and deals to make sure they can both perform and meet community objectives.  But rules that encourage companies to actively shop locations seem counterproductive.