Governments should adopt an investment mindset when it comes to offering business incentives. This means considering both risks and rewards – especially when megadeals and large developments are on the table. Answering these four questions can help state and local leaders mitigate risks and boost the benefits from major incentive projects.
What happens to anticipated benefits if the project changes?
Incentivized projects do not always proceed as planned. Evolving economic conditions, new corporate priorities, and management ability to execute can all affect project outcomes. These factors may have nothing to do with the state or the incentive, but the state still bears some of the risk.
Even the most successful projects are unlikely to operate in a steady manner for decades at a time. What does a site look like in year 10, 20 or 30? Since incentives may be offered for these time frames, states should at least consider the ramifications for their cost-benefit calculations if the project parameters change. What happens if the project is not sustained for the expected period of time to reach the breakeven point on the investment? Do economic and fiscal benefit projections consider project and economic variability?
Will projects still be generating fiscal and economic benefits in two or three decades, or will they become a drain on the community? It is a question worth asking because many communities must devote substantial resources to redeveloping properties that have outlived their economic utility.
Is the incentive structured so that it pays for performance?
One of the simplest mechanisms to limit the state’s risk is to structure the incentive so that funds are paid to the company after it has met agreed-upon contractual milestones. Many states have found this approach preferable to clawbacks that require repayment in cases of non-performance because those provisions often prove difficult to enforce. Performance-based incentives have become the standard in most states.
Does the program enable access to data that will allow state officials to track incentive use, costs and outcomes?
Economic developers and policy makers often need explicit approval or permission to access data sources that will help them determine the actual costs and benefits associated with incentive use. The most valuable state data sources tend to be 1) tax data to determine the costs associated with tax incentives and 2) workforce data to verify job creation and retention. Incentive programs may need specific legislative language to allow economic development organizations and state policy makers access to these existing data sources.
Are fiscal controls in place to contain costs?
After the last recession, some new state incentive program costs increased dramatically and often unexpectedly, causing harm to state budgets. Mechanisms that can help control costs include careful program targeting so that benefits only go to the intended recipients, placing dollar caps on incentive programs and/ or individual projects, minimizing the incentive’s duration, and limiting the transferability and refundability of tax incentives.