May | June 2013


States Look for Niche in Development Strategies

by Jennifer Burnett

Policy Concerns Regarding
the Use of Incentives

While every state and Puerto Rico use economic development incentives, the effectiveness, impact and true costs of those programs are greatly debated among researchers.
Although they continue to be a popular economic tool in many states, some state leaders are increasingly critical of programs that pull revenue away from a shrinking tax base without clear evidence of a payback.
Some of the criticisms of an incentive-focused development strategy include:
  • Incentives are a zero-sum game because they create bidding wars among states. One state luring business away from another with the promise of tax benefits does not create any new economic activity—it just transfers existing activity into another geographic location.
  • Some studies have shown a company’s decision to locate in a particular state has little to do with the incentives offered and more to do with the pre-existing assets of a state, such as workforce education levels, transportation capacity and access, housing affordability and a geography that is appropriately located for the firm’s needs.
  • Incentives are used inappropriately to correct weak spots in the economic climate, tax or regulatory infrastructure of a state. Correcting problems in a piecemeal manner prevents states from engaging in strategic planning to improve their overall business climate, including potentially necessary reforms to regulatory barriers, tax codes, and business permitting systems, workers’ compensation systems and labor relations.
  • The use of limited state dollars on incentives erodes the tax base, leaving critical services—such as transportation infrastructure or education—underfunded. In addition, a loss of tax dollars because of incentive programs could lead to additional taxes to make up the difference, which in turn leads to uncertainty, inequity or instability in the tax system.
In the hunt for jobs, states are re-evaluating their use of scarce resources and that could mean changes for state business incentive programs.
States invest an enormous amount of resources into economic development programs and incentives, in some cases upwards of half a billion dollars per program annually. The payoff can be landing much-needed jobs in a sluggish economy.
Many states have looked to particular industries to find a niche for their development strategies. Three of those industries—the film industry, the “green” economy and the automotive industry—have drawn the attention of several states.
 

Film Incentives

States spent nearly $6 billion in the past 10 years to attract the film production industry, according to The Tax Foundation. Michigan, for example, has invested heavily in efforts to bring film production to the state.
The state set up the Michigan Film Office in 1979 and has been investing millions of dollars a year into incentive programs for films, attracting big Hollywood productions like “Transformers 3” and “The Ides of March.”
But the recession and fiscal cutbacks led to changes in the state’s incentive programs this year.
According to Michael Finney, president and CEO of the Michigan Economic Development Corporation, the way incentives are used—in general and for film incentives specifically—changed significantly in 2011.
In his first term, Gov. Rick Snyder modified many of the state’s incentive policies, including placing an annual cap on the amount of incentive dollars that could flow into certain programs.
According to Finney, in 2010, the state spent nearly $300 million on all state development programs, including more than $60 million on the film industry, with no annual budget cap (limit on spending) on incentives. In 2011, Snyder capped incentive spending at $100 million, plus $25 million for film subsidies with an additional $25 million available for assisting start-ups—meaning the state in 2011 will spend less than half what it did in 2010 on incentives.
However, alongside the new caps placed on incentive spending, Snyder proposed, and the legislature approved, sweeping changes to the state’s tax structure, including eliminating the Michigan Business Tax and replacing it with a flat tax on corporate profits.
“This was a major change in strategy that offered broad tax relief to all businesses, thus relying less on tax incentives to encourage investment,” said Finney.
 

Going Green

The “New Energy Economy” has emerged as a key focus of many state economic development programs, with as many as 39 states developing policies and making explicit investments to advance green economic development as part of their Great Recession recovery strategies. Every state plus the District of Columbia and Puerto Rico offers two or more types of incentives for renewable energy. Similarly, 48 states, the District of Columbia and Puerto Rico offer at least one type of incentive for energy efficiency.
Tennessee has focused some of its development efforts on solar manufacturing with good results.
“Two years ago, we set upon a strategy to make Tennessee a significant player in the solar industry. Since then, we’ve seen more than $2 billion in capital investment, more than a thousand jobs created, and, with the development of the Solar Farm and existing solar companies located in west Tennessee, we have truly created a statewide solar footprint,” former Gov. Phil Bredesen said at a press conference last year.
Sujit CanagaRetna, senior fiscal analyst for The Council of State Governments’ Southern office, said the new energy economy has the potential to reinvigorate America’s lagging manufacturing industries and states recognize that potential.
“States are investing in a number of renewable energy industries—including solar, wind, biofuels, geothermal and hydropower—in an effort to stimulate economic development, preserve the environment and foster energy independence,” said CanagaRetna.
In addition, the opportunity for attracting capital investment in clean technology is significant and growing. Pew Center on the States reports that in 2008, investors poured $5.9 billion into American clean energy businesses, a 48 percent increase over investment levels in 2007.
 

Automotive Manufacturing

Efforts to attract automotive manufacturing plants are nothing new—states have laid out incentives for such manufacturing the past three decades. And many state economic development agencies have been quite successful—especially in the South.
“For nearly three decades now, the ‘Drive to Move South,’ that is, the location of a dozen or so foreign automobile manufacturers and an array of parts suppliers in many Southern states, remains a major economic boost, not only for the individual state economies but also the regional and U.S. economies,” said CanagaRetna. “These foreign automaker assembly plants and parts suppliers have generated billions of dollars in economic impact and tens of thousands of direct and indirect jobs.”
Alabama, for example, is home to 350 automotive-related manufacturers. Their presence in Alabama is due at least in part to incentives offered by the state. The economic impact of the automotive industry in Alabama has been substantial.
“The automotive industry has invested more than $7 billion in Alabama and created more than 35,000 new jobs in the state,” said Alabama Development Office Director Greg Canfield. “We value their presence in Alabama and appreciate the fact that they have helped keep our economy stable. We will continue working hard to land the next industrial opportunity, expand industries that are already here, and provide opportunities for Alabama's work force.”