Four Key Considerations to Ensure Greater Social Impact in Economic Incentives Policy

Economic incentives do not make a bad location look good, but they can make an average location look better by reducing the effective tax rate (ETR), increasing company cash flow, enhancing earnings per share and increasing rate of return on investment (ROI).

There’s little argument that the impact of economic incentives can mean big business for the companies and municipalities involved, but can the same be said for its impact on the community? The noble goal of any economic incentives program is to “aid” in the attraction, and in some cases the retention, of jobs and tax base but there’s a delicate balance between a “good deal” for the community and a “good deal” for the company looking to relocate within that community. Ultimately, determining that balance lies in the hands of the community, which includes its citizens and local government, and requires consideration of the social impacts that might come with an economic incentives policy. Ideally, an economic incentives package should provide a stimulus to all parties involved, including taxpayers. This can sometimes be a delicate balancing act as governments seek to elevate their communities while appealing to corporations.

The social impact of any economic incentives policy should always be evaluated at a community level.  “Social impact” is defined as the effect of an organization’s actions on the wellbeing of the community.  Community social impacts affect (1) employment and unemployment, (2) livelihood and wealth, (3) education and employee training, and (4) skills, knowledge and competences.  When measured, these factors help determine if the economic incentives policy is doing what it should always do: stimulate the economy, provide more jobs and higher wages, and bring more tax dollars into the community and elevating community members.

This blog highlights key considerations to ensure greater social impact in economic incentives policy.

  1. Safeguards for place-based incentives - Discussion around place-based incentives has recently been gaining momentum with the introduction of Opportunity Zones legislation. Companies that qualify for these incentives place a project or projects in a specific geographic area, typically underserved or economically distressed, with plans to commence with certain investment activities such as capital expenditures and/or job creation. Additional examples of place-based incentives include Enterprise Zones and Federal Empowerment Zones. Place-based incentives have long been under scrutiny for having a less than positive social impact on the community. For example, in California, the Enterprise Zone incentive program was determined by the State to not have a net effect on new jobs for the communities where the zones were located.  To encourage more positive community social impacts such as increased employment, many communities are requiring safeguards such as local hiring to qualify for these incentives. To ensure compliance, these programs require a significant percentage of new hires be resident to the community.  
  2. Training incentives - Educated communities with a host of transferrable skills are better positioned to weather downturns in the economy and fill employer’s hiring needs. Training incentives provide company cost reimbursements, company cash subsidies, or free training to employees and/or residents. In a tight labor economy, providing flexible training incentives is a win-win to both the community and the company, providing residents with increased earnings, skills enhancement, upward mobility and stable employment. The company wins with an educated workforce and community ready and able to fill positions as their needs change.
  3. Evidence-based reporting requirements - Requiring evidence-based reporting on economic incentives program goals provides oversight and measurements that help to determine the success of an economic incentives program. Evidence-based reporting is often in the form of transparency reports that include project performance, incentive program detail, and statistics on the state economic development department’s website. Required reporting can be baked into economic incentive policy thru the statute, regulations, or rule-making supporting the various economic incentive programs.
  4. Targeting companies with higher multiplier effects - Many economic incentives programs require a minimum wage and a skill level higher than what many members of a community have.  For example, some incentives programs require that eligible new hires earn at minimum $60,000. Many community members do not have the skill level or educational attainment to earn that wage, so the company must bring in new hires to fill their needs from other communities. For the benefit of the community, targeting companies with “higher multiplier effects” (such as companies that require local supplier companies to fill their needs) can help ensure fair social impact by creating a balance of both higher and lower paying jobs. These supplier companies often must create new jobs to logistically fill the orders of the larger companies. This is known as “a multiplier effect” because it brings in additional jobs and adds economic impact. At the end of the day, the incentive will be paid to the larger company for creating the higher paid jobs, but the community will benefit by adding additional jobs for the community members who do not have the necessary qualifications to be hired by the larger company.
As real estate professionals, we often focus on the location and how it fits into a budget.  Encouraging and guiding economic development stakeholders to focus on the social impacts will not only ensure a “win” for the community, but it can help enable the success of our clients ensuring local resources are ready and available to fill changing labor needs.

Brooke PBrooke-Perez-3.jpgerez
Managing Director, Economic Incentives

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