The use of incentives has become an essential tool available to states and localities to promote their economic development goals. As competition among jurisdictions for new jobs and investments has escalated, particularly over the last decade, the role of incentives in encouraging a prospect to choose one jurisdiction over another has become more important. Since states throughout the South began to offer incentives as early as the 1950s by providing industrial development bond financing, their use has grown to where now every state has some form of incentives at its disposal.

As the use of incentives has become more frequent, the types of incentives have also evolved. Today, incentive programs range from workforce development programs to tax credits for job creation and investment to infrastructure development grants to elaborate tax rebate schemes. At the same time, the cost of incentives has increased dramatically. Not only are states forgoing revenue as a result of tax credits, but they are appropriating millions of dollars to support their ever more complex programs. Incentives, however, cannot and should not be thought of as solely tax credits and grant-type programs. A low tax rate, well-developed infrastructure, and location are also forms of "incentives" that are considered by businesses as they make location decisions.

In 1994, Governor Allen launched the Opportunity Virginia strategic planning process to create a comprehensive strategic economic plan for the Commonwealth. As part of that effort, over 800 business and community leaders participated in forums and regional planning sessions to examine those issues which most directly impact the state's ability to promote economic prosperity. Each of the state's eighteen Regional Economic Development Advisory Councils also took a critical look at its region's strengths and weaknesses in supporting business development.

One of the issues that was identified as critical to the state's ability to compete effectively in a global marketplace was its use of incentives. In the Opportunity Virginia report, an entire section was devoted to the development of a proposed incentives policy and concepts for changes to existing incentives or ideas for new incentives.

In that section, seven guiding principles for the use of incentives by the state to promote job creation and investment were outlined. These principles are:

1. Incentives should be used cautiously and only as a competitive necessity to attract or retain desirable jobs and investment.

2. Incentives must make good business sense.

3. Incentives must promote partnerships between the public and private sector.

4. Incentives must support the opportunities and priorities identified by the state's long-range planning for economic development.

5. Incentives must be available to both existing state businesses and recruited businesses in core sectors, as well as businesses that expand or add to Virginia's economic vitality.

6. Local and regional cooperation and participation are essential.

7. Incentives must be subject to ongoing evaluation and measurement to assess effectiveness and relevance.

In order for any incentives policy to be effective, the Opportunity Virginia strategic plan noted that Virginia must have an arsenal of incentives to effectively compete with other states in economic development, conform to the guiding principles (as outlined above), and provide professional economic developers, local governments, and the private sector with a set of guidelines on what Virginia is willing to do and not willing to do to attract and retain businesses.

For the most part, Virginia's existing' economic development incentives meet the guidelines outlined in Opportunity Virginia. The state offers several specialized tax credit programs; including the Major Business Facility Job Tax Credit, the Recycling Tax Credit, and the income tax and real property investment tax credits under the state's Enterprise Zone program; a customized industrial training program; grants from the Governor's Economic Opportunity Fund; and industry specific performance grants such as the Solar Photovoltaic Manufacturing Incentive Grant.

While Virginia's incentives have generally been very effective in achieving the state's economic development goals in a cost effective manner, there are gaps that exist in meeting the needs of the marketplace that must be addressed as the state enters the 21st century. Moreover, as competition among jurisdictions continues to increase, the cost of incentives has escalated. In a time of tight state budgets, the cost of incentives has also increasingly become an issue.

As a result of the findings in Opportunity Virginia, the General Assembly passed Senate Joint Resolution 369 and House Joint Resolution 616 to create the Joint Subcommittee to Study Incentives to Promote Economic Development in the Commonwealth. In these resolutions, the General Assembly requested the Subcommittee to examine "various initiatives offered by the state to attract and retain businesses in the Commonwealth in order to promote job creation and investment in Virginia's communities and alternative incentive strategies to better utilize existing resources and new incentives."

This report reviews the materials that have been presented to the Subcommittee regarding the use of incentives in Virginia and neighboring states, materials on the national debate about the use of incentives, and the structure of Virginia's existing incentives. The report also makes recommendations for the General Assembly to consider to strengthen the state's existing incentives and create new opportunities for cooperation to promote economic development across the Commonwealth.

In addition to reviewing materials relevant to incentives, the Subcommittee also discussed issues relating to the formation of regional industrial parks. Senator Hawkins introduced Senate Joint Resolution 386 in 1995 to study this issue. He proposed a constitutional amendment to allow localities to form a separate government entity to form and govern industrial parks that would benefit a particular region. Each industrial park would set its own tax rate, and the proceeds from development of the park would be returned to the participating localities on a pro rata basis depending upon their contributions towards the initial construction of the park.

For the purposes of this study, incentives have been differentiated from small business financing and capital access issues. While incentives can promote capital access and business financing is an incentive, the Subcommittee focused on those ways in which the state provides some form of inducement to encourage a business to either relocate to or expand in the Commonwealth.