What drives local incentive decisions: municipal fiscal gain or regional economic impact?

This article is part of an occasional series examining state and local reports evaluating economic development incentive programs.  Here we look at the “Examination of Local Economic Development Incentives in Northeastern Illinois,” by the Chicago Metropolitan Agency for Planning (CMAP). 

This report received attention for its finding that most municipal incentives were given to businesses relocating or expanding within the region – not for bringing new companies to Northeastern Illinois.  This means that while a municipality expected to benefit fiscally, the region would not gain economically.

This is an important finding that likely surprised many in the region because we often think of incentives as a tool for attracting new companies.  However, the authors do an excellent job explaining why this is not the case when looking at local incentives:

Development incentives have an impact on the retail site location process by reducing the cost of initial site improvements and/or local taxes over the long term. This does not create a better market for a retailer, but instead makes an individual site more attractive by reducing standard costs or by paying for extraordinary costs that market-rate development does not normally take on, like brownfield remediation. Thus, incentives may affect retail development at a particular site, but would not necessarily result in additional retailers in a particular market area.

And, considering industrial and office facilities:

After a region is selected, more significant costs such as labor and transportation costs are going to vary less across sites, resulting in local taxes and incentives becoming the variable cost.

Other key points from the report are worth highlighting:

  • CMAP deserves credit for clearly explaining the four main categories of municipal incentives in the region (Tax Increment Financing – TIF, sales tax rebates, property tax rebates, and property tax incentive classes), how they work, the overall tax setting, and how the incentives have been used. This is not easy to do, and the authors did it well. This section alone likely provided tremendous value to the community.
  • The methodology involved creating a list of known incentives and then selecting case studies in order to understand how incentives have been used, the types of industries receiving incentives, and alignment with regional planning goals.  
  • While case studies are appropriate given the report’s objective, the authors do not shy away from providing summary performance data where possible.  For example, “TIF use in the region is pervasive and around 5 percent of the region’s total property tax base goes toward generating revenue for public and private development projects in these specific areas.”
  • Transparency is still a problem.
    • Reporting on incentive use is “extremely uneven,” and some communities do not even bother to submit reports that are required by state law.
    • A new law passed in 2012 requiring filing of reports on sales tax rebate agreements allows critical information (such as the amount of sales tax rebated!) to be redacted and exempt from FOIA.
    • Overall, the authors found that most communities are not providing thorough documentation on how incentives are being used.

The full report is worth reading if you are interested in how and why local incentives are used.  It also provides a useful examination of incentive use in the context of broader regional planning goals, making it valuable to those of us outside of Northeastern Illinois by making the connection between the planning and economic development worlds.

And it helps explain why local governments provide incentives even though it may not seem to make economic sense.

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