A new survey provides a detailed portrait of how local governments use business incentives, finding many lack basic accountability measures. Just how effective tax breaks and other incentives are at boosting economic development is a crucial question states and localities should answer when they look to expand or renew programs. As a recent article written by Mike Maciag in the November 5 edition of Governing reported, however, the extent to which local governments actually scrutinize economic development programs varies greatly, and many remain without basic accountability measures. Most published research focuses on tax incentives at the state level, where the largest packages are typically awarded. A new nationwide survey by the International City/County Management Association (ICMA), though, provides a detailed portrait of how local governments use business incentives and employ accountability measures.
For the most part, the survey of about 1,200 local governments and agencies suggests they are taking measures that, if done correctly, will help to ensure better returns on investment. Three-quarters of survey respondents reported measuring the effectiveness of business incentives, while 73 percent conducted cost-benefit analyses. A smaller share (56 percent) reported always requiring performance agreements, while 27 percent had agreements in place for some incentives and 17 percent did not use them at all. Only 36 percent linked economic development priorities to budget processes.
It's more difficult to gauge how effective and reliable localities' practices truly are, though. Cost-benefit analysis is a particularly controversial area of economic development, for example, and such reports are often characterized by unrealistic assumptions or questionable methodologies. Daphne Kenyon, a fellow at the Lincoln Institute of Land Policy, said the survey results for both cost-benefit analysis and incentive measurement were better than she expected. One potential concern she cited was that some evaluations may be conducted by the economic development agencies rather than more objective outside groups.
Measuring the effectiveness of incentives is no simple task. Take, for example, job creation -- the most common measure used according to the survey. Tallying employment counts before and after an incentive is a far different matter than determining how many jobs would actually be gained or lost absent an incentive. "It all depends on who you ask and whether you're a tough judge of the numbers they give you," Kenyon said. Still, going through the motions -- even if reviews are limited -- is better than doing nothing. "Just taking the sober view of looking at costs and benefits can be so vastly better than a naïve mentality," Kenyon said.