February 5, 2016
More Bang for the Economic Development Buck
There’s been a lot of talk this year about various kinds of incentives as a way to attract businesses and create jobs. The governor’s proposed budget increases funding and creates new programs while legislation in the General Assembly would expand Virginia’s already thick portfolio of grants and tax breaks.
The state can and should play an active role in promoting future growth and employment, but Virginia’s incentives have plenty of room for improvement. As lawmakers consider more incentives, such as the proposed GO Virginia initiative, they should keep in mind what really works best, as highlighted in state reports and by national experts. These include picking the most productive investments, holding companies accountable, and conducting robust post-project analysis.
Picking the Most Productive Investments
Virginia spends a lot of money to attract and or encourage expansion of big, out-of-state companies – in the face of evidence that focusing on encouraging entrepreneurship and expanding businesses already in Virginia is where the most growth potential is found. Between 1995 and 2013, more than 80 percent of Virginia’s job growth came from start-ups and the expansion of businesses already in the state.
In addition, small grants rarely carry enough weight to sway businesses’ decisions on where to locate or expand. JLARC found that only 10 percent of site selection decisions happened because of awards. Jobs that come from the other 90 percent would have happened anyway, making the state’s actions a waste of taxpayer money. Instead, limiting the number of grants from any given program, so administrators have to prioritize projects with the highest economic impact, is an effective practice. As a result, each grant could be worth more, and directly address the shortcomings of specific site locations in order to carry more weight in decision-making.
Just like an unaimed arrow can never miss, an unmeasured economic development incentive can never be held accountable. Every grant and tax credit should have a performance agreement outlining requirements for job creation, wages, and investment over a period of time.
But just collecting data is not enough. The actual performance of all incentive recipients should be verified by checking documents such as employment records or property assessments. When projects fail, the state should take its money back through “claw-backs.” For riskier projects, this could require storing funds in escrow accounts.
The Virginia Economic Development Partnership creates a report for annual review, but self evaluation is unavoidably biased. House Appropriations Committee staff recently suggested establishing an independent unit in JLARC to undertake ongoing analysis of incentives. No matter the form it takes, reviews should be performed by an independent body and should include an analysis of the overall impact within regions and the state as a whole. After all, the goal of economic incentives is to strengthen the entire economy.
This wider view of impact is necessary, because subsidized investments will often crowd out other investments. For example, a grant that “creates” X number of jobs at a widget factory could reduce jobs in competing widget factories on the other side of town. When ignored, this “crowding out” reduces the stated benefits of economic development. Once adjusting for “crowding out” and the low percentage of firms whose location and expansion decisions are actually impacted by incentives, many incentives look less favorable.
Economic development incentives can be an important tool for promoting the long-term growth of Virginia’s economy. They can also be easily wasted or misused. As lawmakers expand and create programs, best practices and real accountability must be included to ensure that dollars are not wasted and Virginia’s economy is strengthened.
–Aaron Williams, Research Assistant