Nuts and Bolts Economic Development (Part II) Understanding the Benefits

June 2014

As newspaper editors warn:  “Don’t bury your lead.”  Don’t bury what a customer really wants to know.

Economic developers need to market the benefits of businesses locating in their community.  Communities that want to market to everyone, their own (voting) population, all consumers, and so on will lose focus on your marketing message.  It can feel good to tout all the wonderful features one possesses but that message will often be lost on the target audience – business.

Sales people say, “Don’t sell the features.  Sell the benefits.”  Yet it is so easy to want to sell your whole story that communities repeatedly try to sell everything they take pride in about their community.  And many people who are shopping your community won’t care.  Worse yet, the potential investor will fail to notice the important factors because they are buried in all that other “stuff.”

As economic development professionals we want to influence decision makers.  Your job is to help new and expanding businesses to solve their problems.  Your message should resonate with decision makers.  What are they are likely to want to know about and how can locating in your community benefit them:

  • Does your community have the right location or building?
  • Can your community provide the infrastructure the company needs?
  • Can they find and attract the labor they need?
  • Can you save me money to move in or expand?  (Natural advantages, taxes, incentives)\

Economic development professionals need to answer our customers’ most salient questions first.

Communities wish to highlight their award winning schools but that highlight doesn’t answer questions of labor force availability.  Of course someone can make the indirect argument that good schools will lead to a better labor force but that fact really doesn’t answer fitness of the workforce, quantity and rates.  An emphasis on quality of life factors, important for relocations, will only matter to the business audience if you can first address the business concerns.  

Everyone has something to tout.  Every community has a (urban, rural, suburban, cosmopolitan) quality of life. But what you need to ask yourself what makes your community good for business even if it’s not completely unique.

Who benefits from your economic development?
Shifting focus from marketing to program evaluation, it is knowing which benefits are important that will help in setting policies. You have to ask how does your government directly benefit from economic development?

The interests of various entities are not the same.  You need to protect yours.

If you are a state government you benefit from new jobs and the income generated.  That is because most states collect personal income taxes from employees and management as well as sales taxes from increased consumer spending. Additionally the state collects business taxes such as the corporate income tax.

If you are a local government the business locating in municipality may mean new property taxes and, in some states like Connecticut, personal property taxes.

Incentives such as tax breaks and grants can be helpful in helping a company make a locational decision.  Jurisdictions that don’t offer them likely have strong markets and don’t need them to be considered.  Jurisdictions that do offer incentives offer them to lower the barriers to entry, to distinguish them and be competitive.  Entities utilizing tax incentives should determine the fiscal impact of the incentives.  Communities should know the payback period?  The payback is when a given amount of tax or grant incentives will begin to yield a positive income flow above the cost of any incentives that are provided.  I wouldn’t put too much in justifying payback using complicated spending multipliers.  Chamber of Commerce brochures from the 1970s used to say that each dollar spent on manufacturing yielded a hundred dollars in additional spending.  If multipliers truly are at work, it’s gravy for your jurisdiction.  Please evaluate cash-on-cash returns.  This comes from new taxes from new private investment.  Would you really need or want a payback more than five years out?

It’s usually easier to provide incentives on new construction because the increase in value is from a small baseline, say vacant land.  But providing infrastructure does have some costs that are desirable to cover.  Some southern states offer incredible incentives and remain low-income locations.  One might ask what the long-term advantage is to that state?

It is important to encourage investments.

Let’s differentiate between direct market driven locations, which you would not normally incentivize, and net export businesses that import wealth into your community and could locate elsewhere.  Perhaps anywhere. Incentives to grab the latter may be worthwhile.  This is why state policies often favor manufacturing and certain base service industries such as insurance or television and movie production.

With scarce resources it is not possible to provide special incentives every business.  Market driven companies such as fast foods, gas stations, and grocery stores locate in your community because they can sell to the people who already live or drive by.  The location itself is the incentive.  Businesses will happily take any cost saving incentives that your community offers; it helps them compete with businesses that are already there. You are not picking winners and losers; you are picking businesses with the highest return for your community who don’t have to locate in your community.  Yes manufacturers take advantage of roadways, but they can pick a location in a nearby community and still use your roadways.  It pretty obvious you want to have them invest in your community.

Your incentives and ability to provide predictable service can truly help land the company.

When local governments place too much weight on jobs they often help create jobs for employees from their neighboring communities.  Yes, jobs are wonderful but localities that pay incentive costs from their own budget and should look to tax and other relevant income generated for that budget.

And if you care about paying living wages and benefits almost every manufacturer and base service job fits the bill.  Retail service jobs, important as they are, often don’t provide a livable wage or benefits.  The quality of those jobs cannot be made up by quantity.

Under special circumstances, where the market has failed with low rents and even blight, providing incentives for a company to locate in a challenged area or to make additional local investments such as public art may be a community investment worth making.  Barring these kind of special circumstances, it is usually best to provide incentives for manufacturing and other base industries.  The added benefit is that jobs with these types of companies usually provide better wages and benefits.

State governments benefits from - Jobs.  Because state’s collect:

  • Personal income taxes from employees and management; and,
  • Sales taxes.
  • Business location in state.
  • Business taxes such as the income tax.

Local governments benefit from - Business location within a municipality (investments) because they collect:

  • Property taxes; and,
  • Personal property taxes.

As important as jobs surely are, increases in productivity due to automation (the microprocessor truly came of age in the 1990s) and global competitive pressures mean that many companies are more measured in their approach to hiring.

It will be useful to you to remember where your bread is really buttered.  Popular political pressures frequently focus on jobs and away from investments.  As an economic development professional be mindful of financial paybacks and communicating.

- Jonathan Rosenthal, CEDAS member

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