Economic development incentives are under scrutiny. Are they producing the outcomes policymakers expect? Are states measuring the right things so that policymakers can weigh the benefits of new investment against its costs? And when is an incentive actually the right tool?
Incentives Under the Microscope, a recent webinar hosted by the State Economic Development Executives Network(SEDE) and moderated by Smart Incentives’ Ellen Harpel, took on these questions. Jason El Koubi of the Virginia Economic Development Partnership (VEDP) brought a state economic development perspective, while Nicholas Miller of the National Conference of State Legislatures (NCSL) provided a national perspective based on the rapidly changing policy environment surrounding data centers.
Here’s what we discussed:
What incentive programs deliver results?
The incentive programs that are most likely to deliver meaningful results are:
- Transparent
- Simple to use
- Monitored for compliance
- Performance-based
- Connected to investments in broader location competitiveness
Jason El Koubi of VEDP emphasized this last point: Incentives that strengthen a state’s competitiveness generate strong returns.
Virginia’s winning proposal for Amazon’s HQ2 provides a good example. 60 to 70 percent of the Virginia’s incentive package was built around expanding the technology talent pipeline and investing in regional infrastructure, rather than traditional business incentives. This blend met both Amazon’s and Virginia’s needs while helping position the state’s entire tech sector for success and generating a 6:1 return on investment (ROI).
The same concept is behind Virginia’s talent initiatives. Programs such as the Virginia Talent Acceleratorand Tech Talent Investment Program are designed to address employers’ workforce needs while building capabilities that can benefit workers and other businesses.
More recent initiatives build on this approach. The Advanced Pharmaceutical Manufacturing Training Network brings together industry, government, colleges and universities to develop a shared workforce for pharmaceutical manufacturers. InternshipsVA expands student opportunities to participate in valuable work-based learning programs while helping Virginia businesses offset the cost of providing these experiences.
How should states determine success for their incentive programs?
Job counts and investment tallies have been the go-to metrics for decades, but economic development leaders generally agree these measures are no longer sufficient for determining whether an incentive is successful.
Stakeholders, especially elected officials, are “not looking for a data point here and there.” Instead, they want to understand the full picture of what an incentivized project is delivering to a community, as well as what it is costing.
That means looking beyond direct jobs and investment to consider questions such as: What other economic activity is being generated? Are local businesses benefiting? What are the effects on infrastructure and public services? Are residents gaining access to better employment opportunities? Are there costs or unintended consequences that need to be considered?
To this end, transparency and ongoing communication are critical for a successful incentive program. The debate on data centers and data center incentives illustrates why. One of the challenges the data center industry faces today is the negative effect non-disclosure agreements and past unwillingness to share details on project parameters have had on community trust. Further, people increasingly want to understand overall impact and ROI to the community (again, not just jobs and investment figures), especially when trying to understand whether an incentive is justified.
What’s going to happen with data centers?
Data centers have been at or near the top of the legislative agenda in nearly every state this year. The discussion has increasingly been about the big picture of what data center investment delivers and what it costs.
Polling at NCSL’s annual summit found that water and power usage and costs are leading concerns for state legislators, followed closely by revenue and incentives. Taken together, legislators are questioning what the return on investment is for data centers.
There has been substantial legislative activity to match the scrutiny. NCSL previously identified 38 states that offer a state level tax incentive for data centers. Early in the year, states were still split between those introducing new incentives and those proposing repeal. As the year progressed, repeal or rollback became dominant, along with widespread interest in “pressing pause” while policy makers consider their options. In the end, the trend was “repeal light,” according to NCSL’s Miller. No state has fully scrapped its data center incentives, but several have paused their use, added conditions, or narrowed eligibility.
Expect data centers to remain a top legislative topic in 2027.
When is deploying an incentive the right call?
The webinar demonstrated the difficulty of answering this question, particularly for data centers. Jobs are one element of ROI, but they are not the only one. For a capital-intensive industry that creates relatively few permanent jobs, cost-per-job alone provides an incomplete picture.
At the same time, large capital investments and potential tax revenues do not automatically make an incentive worthwhile. Policymakers need to understand what costs the project imposes, other benefits that are being generated, and whether the incentive resources devoted to the project could produce greater benefits elsewhere.
In this scenario, thoughtful program evaluations and good-quality data can fill the information gap to help policymakers make that decision.
Evaluations allow policymakers to look at past projects and assess whether anticipated benefits actually materialized.They can identify weaknesses in program design, reporting requirements, data collection and administration that, if improved, can strengthen incentive program performance. Used in combination with economic development expertise, evaluations provide a stronger basis for determining the situations when offering incentives will be beneficial to the state.
Takeaways
We covered a lot of ground in the webinar. My personal takeaways were:
- The most effective economic development incentives combine business incentives with investments that strengthen a location’s underlying competitiveness.
- The specific type of incentive is less important than how the pieces come together to create meaningful economic development opportunities for businesses, people and places
- Elected officials and residents want the full picture. They need to understand what an incentivized project is delivering to and costing a community, not just the number of jobs relative to the size of the incentive.
- Data center policy is putting these principles to the test. The emerging emphasis on guardrails rather than simple yes-or-no decisions reflects the complexity of the choices facing policymakers.
- Regular evaluation is essential. It allows economic development leaders and policymakers to understand incentive costs, benefits, and ROI, while also identifying ways to improve program effectiveness.
- Communication is part of a successful incentive policy. States need to explain not just what they spent and what companies promised, but how the investment contributes to the broader economic and community goals.
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