Government Aid Makes a Difference
(The Business Journal, July 6, 1987)
By Richard H. Carson
The 1987 Oregon legislative session has added to the tools and resources used by state and local government in their quest for the retention, expansion and recruitment of industry in Oregon. These new incentives are a mixed bag of state lottery, general fund and legislative programs dedicated to economic development. This amounts to millions of dollars that will be invested in public infrastructure, regional development projects and job training. This is in addition to existing programs such as low-interest business loans, industrial revenue bonds, public improvements through tax increment financing and enterprise zones.
Every business survey done points out that government incentives are not a major factor in the initial corporate location decision-malting process. However, once a company has narrowed its facility location options down to two or three areas, then incentives do make a critical difference. Besides the obvious cost savings to the company, there is also the intangible value of incentives as a measure of community and state pro-business attitude. The argument that no financial incentives should be offered in a free market society is a logical one, but totally out of step with economic reality.
A survey of corporate facility planners, conducted by the Industrial Development Research Council, indicates that almost half of the companies "actively seek" incentives such as tax reductions, low-interest financing on facilities, infrastructure improvements and job training. The same companies were less interested in such extreme incentives as rent-free facilities, free land, cash grants and 100 percent corporate income tax exemptions. It is worth noting that almost half of the companies indicated that the "deciding factor" in their location decision was the use of special incentives.
The competition for jobs and investment is fierce in this post-recession era, and a community or state decision to forego incentives is a decision not to pursue economic development. The amount of revenue and jobs gained by an industry decision not to locate or expand in an area is zero. The failure to retain an industry can mean substantial loss in tax revenues and jobs, plus an increase in very real social costs.
The U.S. Chamber of Commerce publication (1985), titled "What 100 New Jobs Means to a Community," says that the reward for recruiting or retaining 100 manufacturing jobs is estimated to be:
- 64 additional retail and support services jobs
- $1,948,353 per year in personal income
- Seven retail establishments and
- $1,477,453 per year in retail sales.
The question then is how can government use these tools effectively, and where does it draw the line in providing incentives to any particular company? The first step is to learn about the investor's operation and needs before any incentives are discussed or offered. The second step is to do a basic cost benefit analysis to determine the jurisdiction's actual return on investment. Government is a money-making (collecting) activity, and that money is collected through property taxes, corporate excise taxes, personal income taxes and a variety of assessments and user fees.
An incentive package should not be presented to a company until the state and local officials have estimated how much long-term net revenue can be generated by offering what amounts to a short-term public investment in the company. The time frame for the revenue analysis should be over the life of the facility. With the current trend toward leveraged buyouts and corporate takeovers, that time frame should be conservatively estimated at 10 years. Once the estimated revenue stream from a specific company can be determined, then the political decision can be made regarding the incentive package.
By using data from an Economic Development Department tax revenue analysis of several Japanese investments, it can be estimated that 100 manufacturing jobs and 64 non-manufacturing jobs could generate the following annual revenues:
- Corporate excise tax $ 43,700
- Personal income tax $133,060
- Local property tax $289,811
- Total tax revenue $466,571
This is the equivalent of $4.7 million in new government revenues over the 10-year facility life. The political question to be answered through a cost-benefit analysis is how much in incentives should be offered to secure the new tax revenue? Does the jurisdiction make $1 or $1 million as it return on investment? Does the intentionally lose money in order to spur growth or put people back to work? Only the elected officials can make that decision, but such a decision should be made knowing what the real fiscal impact be.
The U.S. Chamber of Commerce also notes that the average cost per nationally for educating the worker and providing public support facilities is $63,401. Government incentives are in addition to this basic public cost. As an example, the Oregon lottery program, which provides infrastructure (road, water, sewer) to a specific site selected by a company, costs the state an average of $1,545 per job. This would indicate that any discussion of government incentives pales before real issue of financing the basic infrastructure, public services and education needed by industry.
Richard Carson is the manager of the industrial properties section of the Oregon Economic Development Department.