From the Good Ideas File: The Best Incentives Might Not Require Moola

I love what Ellen Harpel at SmartIncentives.org has been doing to increase the awareness of rational and analytical approaches to economic development incentives, a topic that has been such a bee in my bonnet (and a few other bonnets, although who wears a bonnet anymore…) that a whole section of The Local Economy Revolution focused on it.  Ellen has deep cred in the analytics of incentives deals, and she’s the most active person I know of in terms of figuring out how to do that analysis right.  People like Ellen are the ones that give me hope that we might eventually get over the fingers-in-our-ears, everything’s-fine-really-it-is approach that we’ve been too often taking when insightful people point out that our incentives methods aren’t working and are causing big problems on their own.  I’ve said before that I think there are appropriate times and places for incentives, but a lot of times we’ve gotten way too far away from that.

In this piece, Ellen identifies that economic incentives, in many cases, might be of less value to a business than other kinds of help:

One of the trends we have identified in incentive use is the increasing provision of highly specialized business services. These are not run-of-the-mill business assistance programs, but customized and outcome-oriented services that take the concept of partnership between a business and a community to a new level.

These specialized services can be grouped into three main categories:

  • Workforce

  • Innovation

  • Connections & collaboration

Ellen gives some good examples of these three types of incentives at work, and she concludes:

Specialized business services are increasing in popularity as a complement to traditional financial incentives.  There is overlap and blurring of lines among the three most dominant types of these services – workforce, innovation and connections – but the trend toward deeper engagement between community and company could not be clearer.

Your community may have key opportunities in these spaces to disrupt the big money-throwing incentives battles, and you as the ones who know your communities’ resources best are probably in the best position of anyone to make that difference.  Especially in small business and emerging tech development, your role as the connecting tissue might be more important than whatever bucks you can offer.  For a good example, take note of what Annapolis, Maryland’s economic development organization has been doing to help its small businesses create synergy and connect their capacities.

One thought on “From the Good Ideas File: The Best Incentives Might Not Require Moola

  1. Excellent article. In a similar vein, some jurisdictions are using no-cost financial incentives. How is this possible?

    This can be accomplished by a tax shift. For example, some communities have reduced the property tax rate applied to privately-created building values. A lower tax rate on building values makes it cheaper to construct, improve and maintain buildings. This is good for residents and businesses alike.

    But what about the revenue losses? These are compensated for by a higher tax rate on publicly-created land values. Surprisingly, higher tax rates applied to land values tend to make the price of land go down. This happens for two reasons. First, the supply of land is fixed. There is just as much land after the tax goes up as there was before. (When we tax things that are produced, the quantity of those goods are reduced and this pushes up the price of what is left.) Second, higher taxes on land values reduce the profits from land speculation. So this reduces the speculative demand for land.

    Thus, without sacrificing any revenues, this tax shift allows a community to have less expensive buildings and land. This is a boon for employment and affordable housing.

    For more information, see “Using Value Capture to Finance Infrastructure and Encourage Compact Development” at https://www.mwcog.org/uploads/committee-documents/k15fVl1f20080424150651.pdf

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