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COOK: Economic development deals need to benefit all sides

Tim C. Cook / Special to IBJ
March 2, 2013
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CookIn a time when state and local officials make economic development announcements every day, an increasingly common question is, “How does this benefit me?”

For the company receiving incentives, that answer is easy enough; whether it be tax credits or a training grant, they receive some form of financial support. But, what about state and local government, and the public at large—what’s in it for them?

As this question comes up more and more, state and local governments have sought to better quantify the benefits of these deals and portray this benefit to the public. This evolution is a good thing for everyone affected by the process.

Some benefits are easy to quantify. Each job created can be counted. Everyone agrees that the creation of jobs benefits the economy. And for each job created, a certain amount in state and local income tax will be generated.

When a company buys equipment, it will pay state sales tax. There will also be property tax expense on the company’s real estate, regardless of whether it leases or owns the building.

These taxes add up to a total amount that can be tangibly identified.

Beyond the simple adding and subtracting of tax benefits, state and local governments are able to estimate payoff on economic development projects in a more macro fashion. They do this in a lot of ways.

Many communities subscribe to software programs that estimate total economic impact of these projects, or they may pay a third-party economist to do the analysis.

These resources project spending, jobs, tax dollars and other positive economic impacts that a new project will support and create.

Some localities have begun to ask more specific questions about where current and future employees reside, as this affects local income taxes allocated to communities.

Some units of government take it a step further, actually seeking to tie incentives to the local income tax the company withholds from employees, similar to what the state has done with its job creation tax credit for many years to ensure the incentives are performance-based and self-policing.

Other benefits may include a project’s serving as an impetus to a dormant redevelopment area, or expanding a community’s or state’s penetration within a particular industry. Some projects also may have a multiplier effect, serving as anchors or attracting suppliers and related businesses within a given proximity.

Then there is the question of civic involvement by the company. Companies often will be asked how they intend to interact with and give back to the community at large. More and more, localities are seeking specific commitments, whether participating in the United Way, joining the local chamber of commerce or sponsoring a summer internship program through a local community college.

These softer forms of public-private partnerships can be dismissed as too touchy-feely, but the fact is that such involvement can be vitally important for the long-term good of a community and its efforts to promote a better quality of life.

A prime example of this was the fundraising initiative by area businesses to land the 2012 Super Bowl. The corporate philanthropic spirit that intervened to support this effort was rooted in a public-private partnership model that includes groundwork laid by a strong economic development infrastructure.

By fostering this sense of civic readiness in companies, whether it be in recognition of economic development support for a project or just general interaction with like-minded businesses, central Indiana strengthens its foundation for similar future successes.

In recent years, some economic development deals have become more complex, employing less-often-used incentives like tax increment finance and similar bond devices. As a deal increases in complexity, the level of scrutiny increases with it, and that, too, is a good thing.

These tools will continue to play a positive role in the economy only if they consistently produce winning projects and provide reliable security to state and local government for the incentives they employ.

Economic development deals need to pay for themselves as well as provide the opportunity for greater benefits to come. The better job that company officials and officeholders do in educating the public about the return on investment potential of these deals, the more equipped the public will be to appreciate the need to promote support for economic development projects in their communities.•

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Cook is the partner in charge of Katz Sapper & Miller’s State and Local Tax Practice. Views expressed here are the author’s.

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