How do we create living wage and high-paying jobs for residents of neighborhoods of concentrated poverty? One tool we have are business incentives, or, as leading national business incentive economist Timothy Bartik describes them, “tax breaks, cash grants/loans, or services that are (1) targeted at an individual firm, or some industry or group of firms, and (2) intended to promote job growth in a state, or in a local geographic area that is big enough to be a local labor market.”
Business incentives are a (some may say “the”) key tool for creating good jobs at the local level, but economists estimate that anywhere from 75-98% of business incentives have no impact on the decisions of firms to relocate, expand, or retain workers.
In light of this discouraging evidence, local policymakers are right to ask how they can use business incentives more effectively. One of the things that makes Bartik a leader not just in business incentives but in policy research in general is his willingness to put his money where is mouth is and lay out proposals for better policy on the topic he studies. In his recent book Making Sense of Incentives: Taming Business Incentives to Promote Prosperity, Bartik lays out his proposal for an “ideal state incentive program.” While this is tailored to state governments, lessons can be gleaned for local governments as well.
Target distressed areas with high unemployment
Jobs in distressed areas are more likely to go to local residents. Bartik suggests targeting counties, but at the local level, counties and municipalities may want to target certain zip codes or census tracts based on unemployment, poverty levels, or other indicators of economic distress. In particular, looking at objective measures that areas lack adequate jobs can be good guidance for local governments.
Start with basic services supporting economic development
Bartik suggests prioritizing general economic development services over funding services for specific businesses, specifically mentioning infrastructure and high-quality programs for skills development. This is a suggestion that can be directly adopted by local government. Neighborhoods of concentrated poverty often have poor infrastructure, making them unattractive for business. Investment in road and utility infrastructure can improve the ability of these neighborhoods to attract business. These neighborhoods also tend to have lower education levels, so skill training services provided or subsidized by city or county agencies could help improve workforce prospects in neighborhoods and provide partners for businesses interested in locating or expanding in these neighborhoods.
Next, prioritize funding for customized business services
Bartik suggests block granting state funds to counties, but at the local level, these funds could probably be managed by a development agency. He suggests funding be spent on services for “tradable industries”. This means that industries should compete in state or national markets: funds spent on firms that compete locally just shift jobs around the local market rather than bringing new business to the region.
Bartik mentions the following examples of customized business services: manufacturing extension services, small business development centers, business incubators, customized job training, and discretionary hiring subsidies for firms that hire into newly created jobs local nonemployed residents referred and placed via local workforce agencies. All these are strategies that can be used by local governments, especially small business services, customized job training, and hiring subsidies.
Lastly, Bartik suggests a level of funding for these customized services that would provide quality services to all targeted firms. His suggestion is $10 billion nationally. Scaled down on a per-person basis to an example jurisdiction like Franklin County, that would come out to $40 million spent on customized business services, which amounts to about 9% of the county budget—a significant number. For reference, raising this amount of new funds from county sales taxes, the broadest tax the county raises, would require an increase in the county sales tax rate from 1.25% to about 1.4%.
Make tax incentives limited in costs, up front, and open to tradable firms of all sizes
It should go without saying that tax incentives should not exceed the amount owed to local government, but having an explicit policy can keep costs from spiraling out of control. Bartik also suggests making payments up front and using clawbacks to enforce performance measures. This is because businesses value present dollars greater than future dollars, so incentives are more effective if they are front-loaded rather than accruing years down the road. Bartik also recommends making incentives a legal entitlement or having specific provisions that level the playing field between smaller and larger firms.
These are just four suggestions, but the takeaway is this: business incentives can be done better with smarter targeting, more attention to infrastructure and customized services, and prudent policy around tax incentives. Strategies such as these can pay off for residents of neighborhoods of concentrated policy.