Study by Michigan's Upjohn Institute for Employment Research suggests a well-designed business incentive program increases the per-capita earnings of local residents
The Columbus City Council recently voted to change agreements with three developers who failed to meet employment benchmarks spelled out in their property tax abatement agreements.
Developers Pizzuti, Elford Development and Wagenbrenner Development had agreed to use city tax abatements to create 271 new jobs paying at least $12 an hour, but only ended up creating 155 jobs, of which only 31 pay at least $12 an hour. In light of this underperformance, the city opted not to reduce developer tax savings but instead modified the agreements to reflect the number of jobs actually created.
This incident represents just the newest episode in the city's ongoing saga with business tax incentives. Tax incentives are meant to be tools for the city to attract businesses that can then give new opportunities to Columbus residents. Criticism from Yes We Can Columbus, the progressive wing of the local Democratic Party, and a city study of the tax incentive system have recently brought new attention to how the city doles out its business incentives.
Evidence available suggests that such incentives can indeed be good economic development tools. Timothy Bartik of Kalamazoo, Michigan's Upjohn Institute for Employment Research is a leading economist in the study of business incentives. According to Bartik, a well-designed business incentive program increases the per-capita earnings of local residents by more than $3 for every $1 invested in the program.
So what makes a business incentive “well-designed”? In short, well-designed business incentives focus on three elements: how we pay for them; who we give them to; and how they're delivered.
First, business incentives are more effective if financed through taxes than through reducing public services like roads and police. Cutting public services both directly reduces local jobs and impacts business decisions if these public services are valued by businesses. Bartik suggests setting caps on total annual business incentives so that incentives don't cut into public service provision.
Second, incentives work best when they target high-wage jobs, businesses that source locally and export-based businesses. High-wage jobs at businesses that buy locally help bring money into the Columbus economy. Focusing on export-based businesses ensures that these businesses don't compete with other local businesses, like sports stadiums and retail often do.
Lastly, incentives work best when they are paid up front, when they are not cash and when they are targeted to businesses that employ people locally. Businesses are generally more shortsighted than government, so Columbus can take advantage of this discrepancy by making payments up front. That being said, making payments recoverable can be easier if incentives are in-kind, through job training or infrastructure improvements, rather than cash, which a business can walk away with. And including clauses about local hiring can make them more effective.
Business incentives can be good for Columbus, but only if they're done right. Making sure that these incentives are financed correctly, targeted well and designed thoughtfully can make them better tools for improving our growing metro area.