Amazon’s February 2019 decision to pull out of a plan to locate a headquarters in western Queens in New York City sparked a flurry of analysis from journalists. Did Amazon’s decision signal a retrenchment from skyrocketing economic development incentive deals? Or was it a blip, reflecting Amazon’s flatfooted public outreach, New York’s poorly-structured incentive programming and its convoluted politics?
By the end of the week, it appeared incentives had survived Amazon. New York’s governor, Andrew Cuomo, had pleaded with the company to reconsider; other politicians had suggested Amazon reopen its search and pick a third HQ2 location. Still, grassroots and media scrutiny surrounding New York’s HQ2 and other mega-busts—including Wisconsin’s Foxconn and Massachusetts’ GE—have reframed incentive reform discussions. We need to focus not just on improving incentive deals but also on reforming the opaque process that dominates their development and deployment.
What the evidence tells us
Economic development incentives don’t always create the jobs they promise. Recent work suggests that, even under the best circumstances, incentives have only moderately positive effects on jobs, and these jobs are often “zero-sum,” moving from one place to another. Moreover, scholars caution that incentives can exacerbate regional income inequality and have dire consequences for municipal and state budgeting—resulting in underfunded schools, infrastructure and much-needed workforce training (Bartik 2007; Markusen and Nesse 2007). In sum: even if we can link incentives to jobs, those jobs may not be new jobs—and negative societal consequences may outweigh the deal’s employment benefits for a granting locale.
Still, cities and states have relied on incentives for almost a century—and, barring federal intervention, seem unlikely to stop. Economic development scholars have thus shifted from asking whether places should grant incentives to asking how. That is, how can cities and states craft incentive deals to produce better results for firms, the regional economy, and the community? In a recent piece, I—along with my coauthors T. William Lester and Nichola Lowe—attempted to answer this question by separately framing incentives as legal transactions, strategically deployed development tools, and part of a balanced approach to economic development.
At their most basic, incentives are legal transactions—binding agreements between private firms and government. Just as lawyers seek to negotiate for their clients, framing incentives as legal transactions suggests government entities have both the opportunity and responsibility to craft the best possible deal on behalf of their constituents (Weber 2007). Well-crafted agreements could release incentive funding only when established performance metrics (like jobs) have been met. Alternatively, the deal may specify that funding be “clawed back” from firms if performance slips. Relying on legal provisions is not sufficient for creating good deals, but ignoring them can be devastating; Weber (2002), for example, explains how a poorly structured contract between West Virginia and Anchor Hocking left the state on the hook for $64 million even after the firm left for Ohio. The incentive agreement might also include voluntary or binding “community benefits” clauses or agreements (CBAs), such as local hiring or interviewing requirements and living wages, with the idea that subsidized jobs should be good jobs. While CBAs have been credited with ensuring workers and communities share in deal benefits, Wolf-Powers (2010) cautions that challenges in representation, implementation and monitoring mean that promised benefits sometimes go unfulfilled.
Thinking about incentives as legal transactions can also draw attention to the composition of the payment itself. Most incentives are paid in tax abatements, allowing firms to forgo property taxes on land, buildings, and even equipment or construction materials. Yet the large umbrella of incentives also includes equivalent investments in workforce or infrastructure development. These investments are transferable, providing a foundation for future development even if a single deal fails (Bartik 2007).
Focusing on the composition of the deal overlooks the basic question: which firms should receive incentive funding? A city or state can consider incentives to be strategically deployed development tools, and use them to pursue broader economic development goals. Under this approach, incentives are just one of many tools used in a long-term, and very likely more complex, development strategy. In North Carolina, for example, incentives have played an essential role in the decades-long development of the life-sciences industry in the Research Triangle Park region (Lowe and Feldman 2018)—and have complemented community-college training programs, state-funded university technology transfer, and entrepreneurial development. Lester, Lowe and Freyer (2014) suggest strategic use has probably contributed to incentives’ positive performance in the state. Cities and states can also use incentives to strategically support small and medium-sized firm development, recognizing that these firms struggle to access capital while also generating the bulk of a region’s jobs.
But many cities and states do not embed incentives in larger, well-defined strategies. Some jurisdictions choose to pay incentives on an ad hoc basis to any firm that looks like a “good bet”—economically, fiscally, or even politically. Still others have formal programs that award incentives to any firm locating in the region that meets a series of predetermined metrics. These “as-of-right” programs remove economic development officials’ discretion, making it hard for incentives from these programs to fit within well-formulated strategies.
Changing deal-making practice
Crafting legal documents that protect the public’s investments and making sure those investments are part of strategic development goals are both critical to good incentive use. But in a time of hardening state and local budgets, it’s worth asking how much funding incentives should receive when compared to other development programs—that is, how incentive payments fit within balanced development approaches. Jason Gray, a senior fellow at the North Carolina Rural Center, used the metaphor of a three-legged stool: if the stool is economic development practice, then one leg is incentive money and efforts spent on recruitment, one leg is support for existing firms, and one leg is entrepreneurial development. Only with sufficient attention to each will economic development occur—suggesting that incentive funding for recruiting new firms cannot overwhelm other economic development methods.
Before the Amazon request for proposal (RFP) was announced, my coauthors and I collected data on all deals issued in the United States between 1995 and 2010 promising to create or retain 100 jobs. Comparing job growth at establishments that received incentive payments to a group of comparable establishments, we reached a conclusion that falls in line with recent literature: on average, incentivized firms do not create more jobs than their non-incentivized peers. In fact, we found that incentivized firms create fewer jobs than comparable non-incentivized firms. Yet we also found that directing incentive payments to smaller firms does create jobs—suggesting that incentives can work as part of strategic decisions to develop small and medium-sized firms—and that states with balanced development strategies have better outcomes than those that do not.
While we conducted our analysis before the Amazon frenzy, it’s worth noting that in using these frames we can see clear differences in the New York and Virginia deals. All of New York’s proposed $3.5 billion deal was in cash or tax abatements (though roughly half would have been held until 25,000 jobs had been created at HQ2). Yet, in Virginia, Amazon will receive just $550 million only after creating 25,000 jobs; the state agreed to invest $1 billion in schools, universities, and other development agencies—investments that other Virginia companies will surely benefit from. Further, all but roughly $500 million was part of New York’s “as-of-right” Empire program, with incentives automatically granted on a per-job basis. Northern Virginia’s funding, in contrast, was largely discretionary—allowing some possibility of the Amazon deal being part of a larger strategy. While our analysis showed that both Virginia and New York are states with “unbalanced” approaches to development, if we consider the deals as legal transactions or as strategically deployed development tools it’s clear that Virginia made a better deal—a conclusion many analysts have shared.
However, Amazon’s HQ2 site selection process received just as much attention as the resulting RFPs. The economic development literature has long suggested that government employees working at government agencies should develop and implement economic development goals and policy—and only after meaningful consultation with and input from the public. The opaqueness and poor governance structures that dominate not just Amazon’s site selection process, but incentive programming more broadly, underscore just how far we’ve strayed from this ideal process. HQ2’s “public but not transparent” process highlights the need for process reform.
Increasing transparency and participation
Economic development officials must develop incentives in a more transparent manner. One step might be for economic development to return to government agencies. HQ2 bids came not just from formal economic development offices but also from chambers of commerce and other nongovernmental organizations; Detroit even set up a nonprofit for the sole purpose of developing and submitting a proposal. Funneling incentive programming through booster and other organizations is not an institutional quirk. Private and quasi-public organizations, with support from elected officials, often head economic development initiatives in order to avoid the Freedom of Information Act (FOIA) and various state disclosure requirements or public processes that would apply to government-led development. Unfortunately, recent research reveals that the instinct to shield incentive dealings from the public extends across the life of an incentive deal. After combing through incentive deals in Texas, Jensen and Thrall report that over a quarter of firms renegotiated their incentive deals —and that those negotiations were never announced.
This lack of transparency in incentive development and deployment raises troubling questions. If decisions to develop and submit incentive deals are made outside of government, how can we know if a deal is part of a larger economic development strategy, or whether that incentive is instead motivated by a political relationship? And what good do improvements in the incentive document itself—like clawbacks or performance metrics—do if they are rolled back in secrecy? If we want better incentive performance, we need transparency.
Economic development incentive programs must also include meaningful public debate and input. In his writings on economic development practice, Bendavid-Val (1980) stresses the importance of meaningful participation—both from the general public and from community leaders—at every step of the process. Hearings in front of the New York City Council—which had no formal power in the proposed HQ2 development, thanks to provisions allowing Amazon to bypass statutory local land-use approval mechanisms—underlined just how far incentive policy has moved out of the public sphere.
Amazon’s HQ2 experiences provide evidence for why more—not less—public input should occur. Neither Amazon deal came close to having true public input. Nonetheless, community leaders were far more involved in the development of Virginia’s much better—and less controversial—deal. If broader public involvement creates better results while also heading off backlash, then Virginia shows what can be gained from even limited public involvement.
Looking ahead
News since Amazon’s New York decision reinforces the idea that process reforms are integral to creating better deals. Reporting from New Jersey’s Economic Development Authority outlines how officials there allegedly overlooked applicants’ inabilities to meet incentive funding requirements, changed data in spreadsheets, altered net benefits statements, and even created “phantom” out-of-state locations against which New Jersey was competing. Jensen and Thrall report that 42 of 165 firms in Texas challenged their FOIA requests—and that these firms were more likely to have revised their performance metrics. And Virginia’s HQ2 deal includes a provision of two days’ notice for FOIA filings, giving Amazon—the world’s most valuable company—ample opportunity to mount a legal challenge.
Unfortunately, government seems to be learning the wrong lessons about process reforms. In New York, Gov. Cuomo recently inserted a provision into the state’s annual budget bill that would give the governor the ability to remove members of the state’s Public Authority’s Control Board. And rather than prohibit the practices that exempted Amazon from local development reviews and public input, places that lost out on Amazon have begun to push their states to design incentive programs that would supersede municipal land-use and environmental regulations.
It may still come to pass that Amazon’s experience in New York City leads to fewer incentive payments, smaller packages and programs, etc. But incentive reform efforts would be misplaced if they focused solely on legal or strategic aspects of deal-making and ignore process reforms. At a minimum, reformers could follow the lead of LeRoy, Mattera and Tarczynska and push for systems that allow “residents, NGOs and journalists … to sign up for email alerts about each new proposed deal” and that “structure public engagement systems to bring community groups into the planning process,” (p. 10). Longer-term, and to support such systems, reform efforts must focus on pulling economic development practice back into formal government channels.
Bibliography
- Bartik, T. 2007. “Solving the Problems of Economic Development Incentives”, in A. Markusen (ed.), Reining in the Competition for Capital, Kalamazoo: W. E. Upjohn Institute for Employment Research, pp. 103–140.
- Bendavid-Val, A. 1980. Local Economic Development Planning: From Goals to Projects, Planning Advisory Service report no. 353, Washington, DC: American Planning Association.
- Jensen, N. 2017. “The effect of economic development incentives and clawback provisions on job creation: a pre‑registered evaluation of Maryland and Virginia programs”, Research & Politics, vol. 4, no. 2, pp. 1–8.
- Lester, T. W., Lowe, N. J. and Freyer, A. 2014. “Mediating incentive use: a time-series assessment of economic development deals in North Carolina”, Economic Development Quarterly, vol. 28, no. 2, pp. 132–146.
- Lowe, N. and Feldman, M. P. 2018. “Breaking the waves: innovating at the intersections of economic development”, Economic Development Quarterly, vol. 32, no. 3, pp. 183–194.
- Markusen, A. and Nesse, K. 2007. “Institutional and Political Determinants of Incentive Competition”, in A. Markusen (ed.), Reining in the Competition for Capital, Kalamazoo: W. E. Upjohn Institute for Employment Research, pp. 1–42.
- Weber, R. 2002. “Do better contracts make better economic development incentives?”, Journal of the American Planning Association, vol. 68, no. 1, pp. 43–55.
- Weber, R. 2007. “Negotiating the Ideal Deal: Which Local Governments Have the Most Bargaining Leverage?”, in A. Markusen (ed.), Reining in the Competition for Capital, Kalamazoo: W. E. Upjohn Institute for Employment Research, pp. 141–150.
- Wolf-Powers, L. 2010. “Community benefits agreements and local government: a review of recent evidence”, Journal of the American Planning Association, vol. 76, no. 2, pp. 141–159.
