By Alex Pearlstein, Senior Project Manager. 

The provision of incentives is one of the most controversial issues in economic development today and likely will be for a number of years to come. As the competition for relocation prospects intensifies so will the resources applied to influence companies’ decision-making. While much research exists decrying the awarding of significant incentives to large employers, still more will tout the economic benefits of a major recruitment win such as an auto assembly plant. Operations like auto manufacturing that have proven to attract thousands of supplier jobs can be enticing opportunities for a locality and state to offer massive incentive packages. The benefits are more immediately evident than another project that impacts the local economy in less obvious ways. For example, a professional services company that “exports” its services to outside customers will still generate spin-off jobs in the community through a “multiplier” effect of this new money filtering through the community. Often, these beneficial impacts take years to be able to quantify. Likewise, incentives provided to a research-intensive firm could plant seeds for future high-wage employment that won’t be calculated in short-term return-on-investment analyses.

All this comes to mind this week because of an ongoing debate over the efficacy of incentives taking place in the state of Iowa. Governor Chet Culver commissioned a panel of top state officials to comprehensively review all of the state’s incentive tools to determine if any should be eliminated, cut back or reconfigured. The study – released to the public on January 9 – makes the case that the vast majority of state incentives do not lead to measurable employment benefits for Iowa. Needless to say, this information – and the study authors’ recommendations that a number of incentives be capped, reduced or eliminated – has created the real potential that Iowa’s economic quiver could lose a number of key arrows. Some of the cuts are recommended for incentives that economic developers would consider the most valuable in their “tool kit.” Examples include incentives for research and development, renewable energy and venture capital.

Do incentives just line corporate coffers that would have chosen to locate in the incentivizing community anyway? Are public investments rewarded in the form of new jobs, wages and investments? It’s extremely difficult – and MANY have tried – to assess the true cost/benefit of corporate incentives. But what is clear is that companies are increasingly EXPECTING to be offered generous packages as deal-sweeteners. So Iowa’s dilemma – and the potential catastrophic effect it will have on the state’s economy – is whether to risk long-term prosperity for short-term fiscal savings. Is Iowa’s competitive climate so dynamic that companies will spurn lucrative packages to locate elsewhere? Experience has shown that most companies these days will “follow the money” when making a final decision between communities that might otherwise be comparable relocation sites. If I were the Iowa legislature and governor, I would consider long and hard the ramifications of taking a huge step back in the increasingly contentious battle for quality jobs and investment. Rebuilding incentive packages with the state’s economy improves could prove to be much more difficult than fighting to protect what’s already in place.

Please don’t think I’m recommending that boatloads of incentives be provided for EVERY project. There are certainly both golden and rotten eggs in this game. But not having the capacity to make that choice could risk losing the farm altogether.