Description of the Issue
Local economic development incentives constitute essential aspects of urban development economic policies. Such incentives are meant to enhance the development of cities that are considered underdeveloped. The enticements assume different forms. However, the common ones are the policies for providing tax incentives together with improvement of infrastructure (Anderson and Wassmer ‘Bidding for Business 82).
Government provides enticements for financial development in different ranks starting from home and state echelons to countrywide ranks. Fundamentally, economic incentives refer to the cash and or near-cash aid that is provided by local, state, and/or national government to boost or attract various businesses to operate within a given jurisdiction (Greenbaum 75).
The key goal of offering local financial enticements is to foster progress within certain targeted areas. In return, this strategy helps in employment creation in the underdeveloped cities while also encouraging infrastructural growth to take place in stagnant cities. In the long-term, the plan also generates revenues to states and local governments.
Amid these benefits, the issue of whether local economic incentives, which are aimed at fostering urban development in the US, qualify as a cost-effective mechanism of inducing economic growth in the underdeveloped urban areas is relevant to public policy developers.
Importance of the Issue
The effectiveness of local economic development is an important issue facing many metropolitan areas in the US. For instance, ensuring distribution of various businesses within all metropolitan areas and/or retaining economic activities without negating the attraction of new business is of paramount importance to both suburbs and cities in the US (Rubin and Rubin 38).
The significance of these concerns is akin to the relationships between unemployment, flourishing of crime, deterioration of metropolitan areas infrastructure, and economic development. Success stories in retention and fostering of growth of the existing businesses within metropolitan areas together with attraction of new economic activities provide solutions to some of these challenges, such as a reduction of crime rates by providing employment (Anderson and Wassmer ‘Local development incentives’ 109).
Consequently, cost-effectiveness of local economic development incentives that are offered to metropolitan areas such as Detroit is crucial in speeding the process of improving the livelihoods and security amongst metropolitan urban populations.
Background of the Issue
The challenges of inducing development in metropolitan cities in the US date back to 1936 when Mississippi became the first state to develop policies for encouraging industrial development by private stakeholders. Such public policies were sanctioned by the state that deployed industrial development bonds to achieve this endeavor.
Since then, many states and local governments deploy economic incentives such as “IBDs, tax exemptions, TIFAs, enterprise zones (EZ), general obligation bonds, and local manufacturing revenue bonds among others” (Bradshaw and Blakely 235). The issue is whether these incentives are cost-effective in achieving their desired outcomes.
The above issue has attracted criticism and support from different economic scholars. For instance, Peters and Fisher claim that such incentives need to be scrapped since subsidization of new investments has the implication of attracting immigrants who take up jobs, thus leaving the local residents unemployed. In contrast, Wassmer and Anderson hold that even though this case may occur, local residents are absorbed in the new jobs.
The Nature of the Problem presented by the Issue
Although the local governments are given the freedom to offer local economic development incentives, the problem of cost-effectiveness of the local financial growth incentives is important to the states and even the national government. Indeed, the problems that such enticements are meant to solve, for instance, unemployment and poverty, are major interests for national government. State governments have the mandate to oversee resolution of such problems within states on behalf of the national government.
Future Trends Relative to the Issue
The concern for inducing urban development through local economic policies remains significant currently and even in the future. For instance, the Toowoomba Regional Council is currently offering discounts on infrastructure charges to induce industrial development in local townships. This goal is accomplished through “temporary economic development for district township incentive policy and temporary urban consolidation incentive policy” (Toowoomba Regional Council Para.2).
Although these incentives are crucial, issue of whether they qualify as cost-effective mechanisms of inducing a reduction of poverty levels by boosting employment levels within the local metropolitan areas remains important in the development and implementation of the two policies.
Current Policies/Practices taken to address the Issue
Incentives for enhancing investments in cities that are considered underdeveloped are central to the local economic development policies in the US since the 1970s. Urban regions have disputes of disproportionate allocation of different financial tasks, thus creating “labor market issue of a spatial mismatch between low-skilled employees residing in central cities and inner suburbs and the potential employers who are located increasingly further in urban areas” (Anderson and Wassmer ‘Local development incentives’ 14).
In the effort to resolve this problem, policymakers embark on development of incentives that will make people change their business location decisions. Such incentives include tax pardon, setting up zones and authorities for developments, TIFAs, and IDBs (industrial development bonds), among others (Greenbaum 77).
While the main goal of the policies is reducing business capital costs for a particular jurisdiction that is targeted by the local economic development incentives, employment opportunity comprises an accruing benefit that is anticipated from local government expenditure on such incentives.
Desired Policies/Practices to address the Issue
Desired policies need to produce positive effects in terms of resolving the challenges encountered by dwellers of metropolitan cities that were traditionally perceived as underdeveloped. The main challenge is whether the benefits arising from investments in local economic development incentives, for instance, the magnitude of employment generated, measure up to the cost of the incentives.
In fact, states grant their local governments the freedom to issue incentives for economic development. The move implies foregoing revenues that are derived from local taxes in exchange with higher employment and business capital (Greenbaum 78).
The cost of local economic development incentives is only effective when local development incentives facilitate the redirection of employment and other benefits to urban areas where such employment levels and benefits are impossible to achieve without incentives.
Any policy that does not achieve this concern is undesired and/or fails to justify any forgone revenue by local governments. In fact, it is undesired for an incentive to make communities dish out their revenue to business recipients without a corresponding gain (Peters and Fisher 36).
This claim suggests that where such an approach encompasses the methodology deployed by communities to express their competitive advantage in terms of generation of employment together with capital as it may apply to metropolitan areas, communities need to interrogate whether such a policy amounts to a beneficial public strategy.
Cost of Financing the desired Policies
The desired policies discussed above do not advocate for alteration of the current approaches for enhancing local development within the metropolitan area in the US. Rather, the concern is on whether the current policies achieve the chief purpose for developing local economic development policies: rejuvenating employment opportunities and enhancing the availability of capital.
Therefore, achieving the desired policy requires evaluation and monitoring of incentives that are offered by local governments in terms of the level of achievement of the intended outcomes. This process involves no additional costs apart from the cost for hiring personnel to monitor and/or control the implementation of the current policies.
Recommendations
Local economic development incentives are important in enhancing the development of local urban areas that are traditionally considered underdeveloped. Such incentives are achieved at the expense of the local community revenues.
Thus, cost-benefit analysis of decisions on mechanisms of funding the incentives need to produce more benefits in comparison with the cost of the incentives to be justified in terms of achieving their anticipated outcomes. It is recommended that local governments need to conduct a cost-benefit analysis before issuance of local economic development incentives to ensure investment of local communities’ revenues in ways that foster economic development corresponding to the accrued costs.
Conclusion
Local economic development incentives enhance the development in urban areas that have high rates of unemployment. This goal is achieved by using the incentives to attract and retain business in the effort to boost employment levels. The general concession is that increment of employment reduces poverty levels, hence raising the overall wellbeing of communities.
This justifies funding local economic development incentives in the US using local government revenues generated from communities. A prevalent issue surrounding investments of local government revenues in local economic development incentives is whether they are the most cost-effective mechanisms of inducing the development of metropolitan. In a bid to offer a response to this query, cost-benefit analysis for the investments of local government revenue in local economic development incentives is important.
Summary
National administration, states’ governments, and local governments in the US provide development incentives for metropolitan cities in varying levels, although with a similar purpose. Incentives are meant to foster economic development in urban areas that have low employment levels and poor infrastructural development with the objective of raising the living standards of communities living in such places.
In return, the governments anticipate gaining revenue growth from such areas (Greenbaum 75). This concern gives rise to the issue of whether the costs of financing local economic development incentives are justified by the resulting benefits.
Revenues generated from taxation of communities by local governments fund local economic development incentives. This suggests that the incentives must realize outcomes that correspond with the benefits forgone by the local communities. Consequently, the effectiveness of local economic development incentives for booting development of underdeveloped urban areas constitutes an important issue of public interest.
Local communities are interested in acquiring solutions to challenges such as the reduction of crime rates and increased employment levels in underdeveloped urban areas (Anderson and Wassmer ‘Local development incentives’ 109). Local economic development policies can only provide solutions to these challenges if they provide more benefits compared to the cost incurred to generate the solutions.
The issue of the effectiveness of local economic development incentives began to attract public interest as early as 1936 when Mississippi became the first state to develop policies for the provision of incentives for metropolitan city development. Beginning in the 1970s, many states developed similar policies with the intention of fostering redistribution of employment opportunities within states and local government areas of jurisdiction.
Such incentives include “tax exemptions, TIFAs, enterprise zones (EZ), general obligation bonds, and local manufacturing revenue bonds and IBDs” (Bradshaw and Blakely 235). Currently, local governments in the US have the freedom to issue incentives that can foster development of underdeveloped urban areas. For instance, in 2014, the Toowoomba Regional Council has developed policies for providing incentives for industrial development in Toowoomba Township.
Policies like the ones developed by Toowoomba regional council are effective in the extent that they result in resolving the challenges of unemployment and other problems within the local areas that have low industrial development in the long-term. The claim here is that mere industrial development without absorption of a large number of unemployed people within Toowoomba is of no significant help to the people of the townships located in the township.
It also amounts to deprival of benefits to the residents that could have been acquired if the revenues used to finance the incentives are spent on other issues of community benefit. Subsidization of investments within the townships will attract industrial inventors. However, the local economic development policies are undesired in case such investors come with their own employees even if the local government will get more revenue.
To ensure that local economic development policies achieve their desired outcomes, their analysis from the context of cost-benefits analysis in terms of their value to the local communities is important.
This suggests that monitoring and evaluation of local economic development policies are incredibly important to ensure their outcome are of benefit to the community that is undergoing opportunity cost when local government revenue is deployed to fund the incentives. In case the results of cost-benefit analysis reveal that certain local economic development incentives may not directly address the problems of people living within local governments’ urban areas, they are unjustified amid the increased collected revenues.
Works Cited
Anderson, Edwin and Robert Wassmer. Bidding for Business: The Efficacy of Local Economic Development Incentives in a Metropolitan Area. Peter Pauper Press, California, 2000. Print.
Anderson, John and Robert Wassmer. Local development incentives in the United States. Kalamazoo, MI: Upjohn Institute for Employment Research, 2005. Print.
Bradshaw, Ted and Edward Blakely. “What are ‘Third-Wave’ State Economic Development Efforts? From Incentives to Industrial Policy.” Economic Development Quarterly 13.3(1999): 229-244. Print.
Greenbaum, Robert. “Selecting the right site: Where do states locate place-based economic development programs?” National Tax Association Proceedings: Ninety-Third Annual Conference on Taxation 5.2(2006): 74-82. Print.
Peters, Alan and Peter Fisher. “The Failures of Economic Development Incentives.” Journal of the American Planning Association 70.1(2004): 27-37. Print.
Rubin, Irene and Herbert Rubin. “Economic Development Incentives: The Poor (Cities) Pay more.” Urban Affairs Review September 23.3(2007): 37-62. Print.
Toowoomba Regional Council. Economic Development Incentives Policies, 2014. Web.