Magazine article Government Finance Review

When and When Not to Use Incentives to Attract Business or to Retain Existing Business

Magazine article Government Finance Review

When and When Not to Use Incentives to Attract Business or to Retain Existing Business

Article excerpt

These guidelines for recognizing an effective incentive from an undesirable one are designed to assist public finance officers as they walk the fine line between offering a reasonable incentive to a new or relocating business and facing public outcry or even litigation.

Increasingly, municipal governments are being asked to join states and utilities to provide incentives to attract business or to retain existing business. The incentive may take a variety of forms, but among the most common forms of incentive are the following.

1) Expedited or preferential processing. Commonly known as fast-track processing, this technique typically involves prioritizing a desired job and/or revenue-producing project's review ahead of others, as well as coordinating regulatory approvals between departments or agencies so as to speed the processing.

2) Loan of public assets such as land, building or equipment to business for private purposes. Sometimes an industrial development authority, redevelopment agency, or even a municipal electric utility will provide bridge financing to attract a job- or revenue-producing project. More common, however, is the provision of conduit private activity bond or industrial development bond financing to the enterprise.

3) Grant of public funds to business for private purposes. Direct gift of taxpayer funds is prohibited in most states; however, provision of tax rebates and advance payment of some leases for parking facilities or grants for historic preservation or aesthetic improvements, such as building facades or landscaping, often are permitted.

4) Loan of public funds to business for public purposes. Too often ignored is the provision of loans to finance a development's required infrastructure or fees. This technique, when not adversely affecting the municipality's cash flow, can frequently be realized with an interest rate exceeding both investment earnings and bond financing. This can provide a win-win situation for the developer and municipality.

5) Grant of public funds to business for public purposes. Many redevelopment agencies or municipalities will provide grants for required infrastructure when a project achieves a positive utility outcome or positive municipal revenue impact.

6) Lease or sale of public land at below-market rates. A typical redevelopment strategy is to acquire and/or assemble land using tax increment financing and then sell or lease it at a price that will allow the desired development to be successful.

7) Legally permissible waiver or deferral of fees. This technique is always fraught with political problems. Many developers planning a project which they know the city wants will ask for the waiver or deferral of city fees. Some cities have adopted policies to provide partial or whole city-fee waivers or deferral, if a development meets specific criteria, and then substitute redevelopment agency or utility money in the city's treasury to offset the waiver. In many states, performance-based deferrals designed to provide the developer time to build up the business are legal.

8) Provision of services at public expense (e.g., architectural planning or expediting). A new incentive that frequently is also a win-win for developer and the city is to provide the developer, at the city's expense, an outside expeditor who knows the city's processes as well as the developer's needs.

9) Special utility rates. In an atmosphere of increasing utility deregulation, new businesses will seek or be offered special rates based on incremental added cost to the utility or through discounting the rates for an initial two- or three-year period.

Legal Constraints

The Internal Revenue Code regulates the use of tax-exempt bond proceeds for private purposes, while federal statutes govern the use of federal funds or the reuse of Urban Development Action Grant (UDAG) or Community Development Block Grant (CDBG) monies. …

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