The circus surrounding the recent site selection process for Amazon’s second headquarters has shown a spotlight on a longstanding, costly, and controversial local economic development strategy. Unlike most such competitions to attract — or in some cases to retain — large employers, Amazon’s proceeded in public view. Some 238 cities in 43 states, Canada, and Mexico put bids of up to $22 billion in tax abatements and other incentives on offer to a company whose value is nearly $1 trillion.
Many also staged publicity stunts to gain Amazon’s attention. Calgary offered to fight a bear to impress the company, Stonecrest, GA reportedly offered to de-annex 345 acres for the headquarters site and rename it “Amazon, Georgia,” and Tucson, AZ attempted to ship a 21-foot saguaro cactus to Seattle along with their bid. (Thankfully, Amazon turned down the offer before the shipment could take place. The cactus was re-homed at the Arizona-Sonora Desert Museum.)
The provision of tax abatements and other public incentives directly to individual businesses is the largest and most costly component of most local economic development programs. The practice has been estimated to cost state and local governments between $45 and 90 billion per year. The so-called “mega-deals” designed to attract the largest and most iconic facilities have been estimated to cost more than $600,000 per job, or more than 100 times the cost of most job training programs. Is this practice so common because it is so effective?
At the national level, the answer is obviously no. By simply encouraging relocation of companies from one part of the US to another, these payouts do nothing to raise total economic output while costing taxpayers billions. Even at the local level, economic research has long failed to identify any substantial gains from these programs. Several states are undertaking audits of their programs and being increasingly disappointed by the findings — failure to create the jobs, the wage rates, and the capital investment promised. Indeed, to the extent that tax abatements drain funds away from the schools, infrastructure, and quality of life that truly drive business investment, they may actually be counter-productive.
So why do they continue? Political pressure for big wins and splashy ribbon cuttings can overshadow the value of smaller, more patient investments that pay off less visibly and over a longer period of time. And the practice now amounts to an arms race between communities that few feel they can risk opting out of — although some are now beginning to do so.
This summer, Missouri and Kansas enacted a “cease fire pact”, agreeing to stop providing incentives for companies to relocate across the border from one part of the Kansas City metro area to another, a practice that had cost the two states over $300 million in the past decade. And earlier this year, the East Baton Rouge Parish School Board in Baton Rouge, LA voted down $2.9 million in tax breaks to Exxon Mobil, the biggest taxpayer in the parish, using new powers provided by the state government to allow local governments and school boards to opt out of the portion of proposed abatements that would impact them. The vote came under pressure from community groups and school employees, who approved a one-day strike unless the incentives were voted down. The school board was facing a $30 million budget deficit at the time of the vote.
“The recirculation of money within the community actually creates wealth.”
Chris Miller, Director of Economic Development for Adrian, MI — a city of 21,000 outside Ann Arbor — is one of a growing number of economic development practitioners around the country pursuing approaches beyond incentives. Miller says there is a pernicious but pervasive myth at the root of the incentive approach: that the amount of wealth within the community is limited and insufficient, and any new wealth will have to come from outside. This is simply not true, Miller says. “The recirculation of money within the community actually creates wealth,” he explains. “There is not a finite amount.”
“Most economic development organizations put way more money into business attraction than business retention. But we do best by supporting what we have, investing in the businesses that are already here — and then reinvesting that capital locally.” This is not a quick fix, Miller adds, but it’s paying off for Adrian over time. Economic research backs this up. Communities with many small firms see faster job growth than those with a few large employers.
Miller says his community focuses on growing local businesses — both new and existing — by being “laser focused” on supporting entrepreneurial culture and entrepreneurial infrastructure. The city partners with local organizations on a business plan competition, a local investors club, a new entrepreneurship program for juniors and seniors at the high school, and an educational and networking program for new business owners. Adrian also participates in a state program dedicated to making doing business with local governments more transparent, predictable, and easy.
Central to the idea of entrepreneurial infrastructure is access to capital. Miller promotes and practices finding ways to direct local capital into local businesses, rather than having it all flee the region to Wall Street. He is one of the founders of the National Coalition for Community Capital, the organization that sponsored last summer’s ComCap conference, and he led the development of Michigan’s nation-leading investment crowdfunding law. In Adrian, he works with local businesses, banks, and community groups to boost the notion and the practice of including community-sourced capital in the business capital stack.
The recent development of a community kitchen business incubator was funded in large part through a crowdfunding campaign matched by a Michigan Economic Development Corporation program that supports crowdfunded development of public and community spaces. The kitchen is Adrian’s third project in the program. And the community has just completed its first local business crowdfunding raise, on one of the many local investment platforms that now exist.
Another approach to economic development gaining ground around the country is community wealth building. It shares with Miller’s approach a focus on building from within through entrepreneurship and local investment, and adds the dimension of what I’ve been calling collaborative economy strategies, along with an explicit focus on creating opportunity and wealth for those who have been most economically excluded in this country.
Equity has to be an active pursuit
Its emphasis is on broadening the reach of economic development — broadening access to skills, capital, and networks, and also broadening ownership of businesses and assets through cooperatives, community land trusts, and other forms of democratic ownership and management. It recognizes that the trickle down approach to development is trickling less and less — and never reached everyone to begin with — and that equity has to be an active pursuit.
We’ve written about many community wealth building efforts in these pages: communities supporting the growth of worker-owned cooperatives with ecosystems of technical and financial assistance, assisting retiring business owners to convert employee ownership, and efforts by anchor institutions to build community wealth and strengthen local economies. Use of these strategies is continuing to grow around the country. Here in New York, the Adirondack North Country Association (ANCA) has recently created a Center for Businesses in Transition, aiming to help retiring business owners develop and execute succession strategies. They provide workshops and technical assistance on business valuation and sale, transition to family members, and conversion to worker ownership, as well as matchmaking between potential buyers and sellers.
Another key strategy is to invest directly in people and their skills, often in partnership with employers who increasingly report difficulty finding qualified candidates. Workforce development programs cost much less than tax incentives, typically $5000 per job or less. Many localities are now working with employers to develop and support customized training programs to meet employers’ skill needs, either instead of or in addition to tax incentive programs. Cuyahoga County, OH’s SkillUp program, for example, works closely with employers to define job requirements, evaluate employees’ skills, develop a training roadmap, and connect employees to appropriate training providers in the community. The County reimburses employers for training costs at a rate dependent on each employee’s post-training wage increase.
In Philadelphia, the University City District — a collaboration among local anchor institutions, businesses, and residents — operates the West Philadelphia Skills Initiative (WPSI) to connect unemployed residents to employers seeking trained workers. As in the SkillUp program, WPSI creates customized programs geared to employer needs and specific skills gaps, and provides ongoing financial coaching and professional development services to program graduates after placement. In WPSI’s eight years of operation, more than one thousand previously unemployed residents have gone on to jobs and nearly $40 million dollars in wage earnings.
Some regions are combining new and old strategies by targeting tax incentives to underinvested neighborhoods and using public benefit agreements to explicitly tie them to equity-focused activities. The city of Portland, OR, for example, is addressing wealth and income inequality through its Enterprise Zone program, which ties tax abatements in qualifying districts to wage thresholds, local purchasing requirements, and participation in a co-designed set of community-connecting activities that could include partnerships with local schools, providing internships for neighborhood students, hosting job fairs, and support for local business incubators. Participating companies also contribute fifteen percent of their tax abatement into a fund that supports skill development and technical assistance services for all businesses in the zone, as well as transit and child care for workers. Prosper Portland, the city’s economic development agency, describes the program as “a shift from transactional to more relationship-focused economic development”.
As awareness of the inefficiency — and often, outright wastefulness — of tax incentives without any such relationship building sharpens, localities around the country are quietly innovating to drive real economic development results that reach everyone in the community. Each community’s strategies will be different, but we can learn a lot from the many examples out there.