Sunday, July 20, 2003

Expert: Reform incentive policies

By Tony Lang
The Cincinnati Enquirer

David Buchholz, program director for the national nonprofit Corporation for Enterprise Development, specializes in researching corporate tax incentive deals. He says the need for border cities to offer extraordinary tax breaks may be exaggerated. He recognizes the enormous pressure politicians are under to match offers, but that doesn't necessarily make good public policy. One city he studied is Toledo, which spent millions on deals that ended up cutting jobs instead of adding them. City officials commonly avoid follow-up and rarely penalize firms for failure to deliver.

He thinks cities and states can work for reform on two paths simultaneously.

"There is a strong case to be made for a federal solution," he said. Cities can lobby for federal or multistate reforms that would reduce pressure on cities to pony up incentives whose benefits do not offset the cost of enormous public outlays. At the same time cities can take steps on their own to minimize the risks of loss: They can set caps on how much they are willing to spend per job on incentives to keep current jobs or attract new ones. They can require lots of "sunshine": make such deals open and visible to the public. "One of the few bright spots of the Convergys deal was that it has to be approved by city council," he said. A city can insist on clear accountability for performance and "clawbacks" if the company fails to deliver. And a city should set policy guidelines in advance on the kinds of tax breaks and amounts it is willing to grant. If necessary it can break the guidelines for worthy goals such as development in a chronically underdeveloped area, but "it is easier to set policies in advance than when you are under pressure of an immediate deal," Buchholz said.

Economic impact studies of incentive deals can help measure direct and indirect benefits, but Buchholz warns it's very easy to manipulate the numbers through multipliers to claim a deal will deliver the desired economic impact. He urges cities not just to estimate economic impact before a deal but to follow up afterward to see if the promised benefits ever materialized.

He says during negotiations cities and states are at a disadvantage from the "huge asymmetry of information," because generally the company holds all the cards and knows what all its options are.

He argues much more important than tax incentives are the public investments cities make in education for a well-trained work force, transportation and quality of life.

He agrees that every deal is different, but too often politicians use that excuse to justify getting any deal done. All the more reason for cities to craft incentive guidelines in advance such as cost per job created or quality-of-job standards such as salary levels.

Are cities at a disadvantage?
Cities face hard work trying to keep firms
Expert: Reform incentive policies
How city can cope
Convergys I: Make the deal
Convergys II: Incentives
Greg Harris: Regionalism must be our new focus
James Orr: Convergys deal is a defining moment

Federal budget: Fix the deficit
Homeless need a dose of empathy from their critics
Readers' Views