Attracting Economic Development-At What Cost? Vast Amounts of Resources Are Dedicated to Economic Development at the Local, State and National Level. the Strategies Employed to Generate Economic Growth and Create Jobs Vary, but Tax Incentives Have Emerged as One of the Most Popular and Often Debated Tools

By Farr, Jessica LeVeen | Partners in Community and Economic Development, Winter 2005 | Go to article overview

Attracting Economic Development-At What Cost? Vast Amounts of Resources Are Dedicated to Economic Development at the Local, State and National Level. the Strategies Employed to Generate Economic Growth and Create Jobs Vary, but Tax Incentives Have Emerged as One of the Most Popular and Often Debated Tools


Farr, Jessica LeVeen, Partners in Community and Economic Development


Southern states have traditionally relied more heavily on incentives, which are often cited as one of the important factors in the migration of manufacturing jobs from the Northeast to the South. As use of tax incentives has increased, debate has intensified over whether these incentives are a wise investment of public resources.

What is economic development?

Economic development is usually defined as economic growth that leads to increased job opportunities and wealth generation at the city, state or national level. The public sector has a critical role in economic development because it can use public resources to reduce risks and costs that could prohibit private sector investment and job creation.

Different interests and goals must be accommodated in forming an economic development program. Business leaders are concerned with improving the business climate and economic competitiveness of the region. Labor leaders want a strategy that leads to more jobs, higher wages and more worker training. Community leaders think economic development should alleviate poverty and reduce inequality. Public officials want to see overall economic growth in their communities.

While all of these goals are important, different theories exist about the best use of limited public resources. Trade-offs between the different goals may be unavoidable. Devising a comprehensive strategy for economic development that incorporates the different goals and accommodates trade-offs is challenging.

Economic development strategies and assistance

In the past, economic development strategies focused on programs that impacted the traditional factors of production: land, labor and capital markets. However, as businesses have become more willing and able to move to a wide variety of locations, many states and cities have adopted economic development strategies that emphasize reducing the cost of conducting business.

Economic development strategies are characterized by two approaches: An externally focused approach generally directs resources towards new business recruitment and relocation incentives. An internally focused approach directs resources towards a "grow your own" strategy. There is no "one size fits all" approach, and states must develop a strategy to meet their particular strategic goals and economic needs. Regardless of which approach is emphasized, assistance should aim to fix a market failure rather than serve as a substitute for private investment.

Economic development assistance is generally divided into two categories. The first approach uses the tax code and offers tax incentives such as capital investment tax credits, jobs tax credits, sales tax credits, property tax abatement and tax increment financing. Tax incentives for economic development were once more heavily used in the South and Midwest, but now they are offered in at least 40 states.

The second category of development assistance provides non-tax incentives, such as infrastructural improvements, subsidized financing, direct cash grants, loan guarantees and other forms of business assistance. These may be offered in conjunction with tax incentives.

Do tax incentives work?

The effectiveness of tax incentives is a common debate in economic development circles. Proponents of incentives, including many public officials and corporate leaders, say they are a necessary tool for attracting business and promoting job creation and retention. They argue that states or cities that do not offer tax incentives are at a competitive disadvantage when attempting to recruit or retain jobs that could migrate to another state or country.

Proponents argue that tax incentives pay for themselves by generating additional revenue as businesses expand and jobs are created. Supporters of this view point to several economic studies that show the multiplier effect of tax incentives and indicate the return on investment exceeds the actual cost of the incentive. …

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Attracting Economic Development-At What Cost? Vast Amounts of Resources Are Dedicated to Economic Development at the Local, State and National Level. the Strategies Employed to Generate Economic Growth and Create Jobs Vary, but Tax Incentives Have Emerged as One of the Most Popular and Often Debated Tools
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