Thinking Out Of The Box

The article is taken from the Hamilton County Business Magazine written by Mike Corbett, editor with permission to rewrite for the Hamilton Reporter.   The article / interview “The Flaw of Attraction” research questions the value of tax incentives for economic development was written by Mike Corbett as an interview with Dr. Michael J. Hicks, Ball State University Economist. Go to the Business Magazine to see the entire article as originally written.

Millions of tax payer dollars are offered up each year to new and existing businesses in order to secure the new construction or to retain the business in the given community.  Often Hamilton County communities get into a bidding war as the development community approaches more than one location to get the best deal.  It is not unusual for an existing business to say, “We love the community but we must move on for business opportunity”. That is code for what kind of money will make us remain in the community.  At hearing that statement the community starts to offer dollars to retain the business.  Many times, only a few new employees are guaranteed.  Very little is gained by the community and the opportunity to reinvest in the community to help all citizens is lost.

Dr. Michael J. Hicks in a presentation to the Westfield Chamber of Commerce believes these incentives just don’t work especially in the long run. It is clear that capital based tax incentives does nothing to induce net employment growth or net business investment. The worst of these are abatements followed by tax increment financing (TIF).  These kinds of abatements and TIF, generally move tax revenues away from local government or shifts the cost to other local taxpayers.  Only 2% of new employment since 1990, come from relocation of firms. Dr. Hicks also suggests that firms who make their money from the sale of bonds and negotiating abatements are the winners and want to keep the economic development community coming along in support.

“It is an unpleasant reality that the fortunes made by bond attorneys plays a bigger role in the deployment of economic development dollars than does the welfare of citizens and communities in Indiana,” according to Dr. Hicks.  Most communities do not even track the total dollars given away or the cumulative effect to the city or town.  The argument for incentives is that everyone is doing it and how can we attract new business if we (the cities) do not play the game?  Dr. Hicks believes in a multi part answer.

  • Cities must make themselves a place where people want to move by crafting top flight schools, making their communities safe, offering public spaces where citizens can enjoy themselves. Making their city squares the type of venues that a varied type of recreation and retail business world want to locate.
  • There is a viable argument for business attraction to occur at a broad regional level rather than such duplication of offering dollars for business.
  • Spending money on attracting firms to the really fine communities in Hamilton County boarders on the absurd. Hamilton County is the fastest growing counties in the US and should do nothing to lure new businesses that ups the cost on current residents and firms who have already invested in the community. Hamilton County is successful because of investments in quality of place, not business attraction.
  • The availability of workers is the overwhelming location determinant and has been so for several decades.
  • Studies give human capital the strongest edge in attracting and retaining business.

The new game in town is the single paying TIF where a district is created that returns the tax increment back to the single payer instead of within a geographic area for one project.  Ball State, LSA, USI and Purdue have all published studies that report the benefits of TIF are much smaller than their costs. TIF and tax abatements pull close to a billion dollars a year out of local government coffers. That is one out of every seven dollars and for most communities and that is more than property tax caps.

“Make no mistake about it, the need for Hamilton County to have to supplement school funding through property tax referenda is due to the excessive use of TIF and tax abatements”, according to Dr. Hicks. He continues to say,” Development incentives are not a free lunch.  It costs real money and lost opportunities to do other things for their communities.  All voters should understand this and hold consulting firms, elected official and economic development folks accountable.  Building the community first for all the citizens is the goal and business will follow.