HD59 - The Feasibility of Various State and Local Governmental Incentives to Encourage Economic Development

  • Published: 1994
  • Author: Secretary of Commerce and Trade
  • Enabling Authority: House Joint Resolution 579 (Regular Session, 1993)

Executive Summary:
The debate about whether or not states should provide economic incentives to prospective employers has escalated significantly over the past ten years. Unfortunately, much of the debate has been based on theory and perceptions, not on fact. Even more importantly, the debate has yet to define what is, and is not, an incentive. Accordingly, public policy makers may be well served to clearly analyze the evolution of incentives, define the programs, and review a comparative analysis of alternative means for expending public funds.

The following report outlines the differing denotations for the expenditure of public funds. All funding in the name of economic development is not, as connoted, an incentive. Once the distinctions have been made, it is easier for policy makers to identify the benefits and costs associated with attracting new, and/or retaining old businesses. Ultimately, with this analysis, policy makers are provided a vehicle to determine the worthiness of funding programs based upon the ultimate benefit to the citizens, the businesses, and the communities of the Commonwealth of Virginia.

House Joint Resolution No. 579, passed by the 1993 Session of the General Assembly, requested the Secretary of Economic Development (Secretary of Commerce and Trade) to examine the feasibility of various state and local governmental incentives to encourage economic development.

Highlights of Finding

• On the whole, national research is not very supportive of incentives. From a macroeconomic point of view, incentives produce nothing of value and do not increase national wealth. They merely transfer resources from the public to the private sector. Traditional economic development programs, such as introducing new firms to the export market, actually increase U.S. wealth.

• Until public policy makers and the business community establish principles of conduct, there will continue to be competition among states for new domestic investment, and foreign firms have significantly increased their demand for state funded subsidies.

• Given that the use of incentives by states is not simply going to go away, it is imperative that public policy be directed to ensure that funds expended to influence private development support public goals.

• The General Assembly's objective is to create economic growth for the citizens, the communities, and the industries of Virginia. The distinction must be made between reinvestment prop-rams which expend public funds for the public benefit and company specific incentive packages which expend public funds for the benefit of one particular company.

• Nationwide, economic development incentives and programs are suffering from the lack of quantitative and qualitative assessment. Unaccountability of public funds expended is the norm, not the exception. The recent Mercedes-Benz offer demonstrates the spectrum of contrasting public policies. Where Alabama has pledged Mercedes-Benz $253 million to potentially create 1,500 jobs: a cost of over $169,000 per job, Virginia has expended $6.8 million from the Governor's Economic Opportunity Fund to benefit 21 different companies and create 6,128 jobs: a cost of only $1,100 per job. The fund helped create jobs within our current businesses, and it helped offset the extraordinary costs associated with new business locating in Virginia.

• Virginia's most effective economic reinvestment programs, workforce training, industrial road and rail access, revolving loan fund, and the Governor's Economic Opportunity, largely emanate from a long-standing strategy designed to bring manufacturing jobs to rural areas. These programs should be revised to ensure their applicability to all areas of the Commonwealth, with special emphasis one merging high technology companies.

• Virginia's business tax liabilities are among the lowest of the states examined. Whereas other states often use tax incentives to offset their higher tax rates, Virginia does not have to offer tax breaks since its rates are already lower than competing states.

• Several trends are emerging among economic development programs in neighboring states that target white-collar jobs and entrepreneurial activity.

Summary of Recommendations

• Virginia should adopt a set of principles to guide interstate competition, particularly pertaining to the use of extraordinary financial incentives. One recommended model is the National Governor's Association, August 1993, "Incentives: Interstate Cooperation" agreement.

• Virginia should pursue its strategic plan (HJR 389) to continuously improve the business climate which allows business to achieve economic success and provide jobs through a rational tax policy and regulatory and legal environment (i.e. workman's compensation, efficient and effective government) by reducing regulatory barriers.

• The General Assembly should support economic development and should engage in traditional and entrepreneurial economic development policies and programs that support Virginia's existing business base. These policies and programs should be subject to a periodic evaluation to measure quantitative and qualitative results from the public funds expended. Among these program recommendations are increasing funding for workforce training and a continuation of the Governor's Economic Opportunity Fund and the Industrial Access Road program.

• Legislation creating local industrial development authorities should be reviewed to increase flexibility. In addition, the results of the enterprise zone program should be reviewed and consideration given to modifying it to improve its ability to help encourage job creation and investment in Virginia.

• Virginia should adopt a sustained investment strategy that supports human resources (education, job training) and infrastructure development (transportation, energy, telecommunications) and environmental stewardship.

• All states should discourage the offering of customized firm-specific incentive programs which pit state against state in bidding wars.