Economic Development

How It Works

Economic development spending includes tax incentives (property tax abatements under state enabling statutes, tax increment financing, payment-in-lieu-of-taxes or PILOT agreements, enterprise zones), direct business subsidies (cash grants, forgivable loans, job training reimbursements), site preparation and infrastructure improvements, workforce training partnerships with community colleges, small business assistance programs, downtown redevelopment authorities, and marketing campaigns. Total annual state and local economic development spending in the United States is estimated at $90-$100 billion per research from Timothy Bartik at the W.E. Upjohn Institute, with the majority in property tax abatements and income tax credits rather than direct cash. The effectiveness of municipal economic development spending is hotly debated in academic public finance literature. Critics (Good Jobs First, the Brookings Institution, and researchers including Enrico Moretti and Nathan Jensen) argue that tax incentives represent a "race to the bottom" where cities and states compete by giving away revenue to firms that would have located somewhere similar anyway, with meta-analyses of incentive studies finding that roughly 75-90% of incentivized investments would have occurred regardless. The 2018 Foxconn deal in Wisconsin ($4.5 billion in state and local incentives for a plant that ultimately scaled back dramatically) is a notable cautionary tale. High-profile "HQ2" competitions (Amazon's 2017-2018 bidding war that ultimately selected Crystal City, Virginia with Tennessee partial placement) expose the asymmetric information problem. Proponents (the Council of Development Finance Agencies, the International Economic Development Council) argue that strategic investment attracts anchor employers that generate tax revenue, multiplier effects, and quality-of-life improvements. GASB Statement 77 (effective 2016) requires disclosure of tax abatements in government financial statements, providing transparency on forgone revenue. Economic development spending feeds into the 10% revenue diversity and 10% trend direction factors of the CitySpend Fiscal Health Score.

Related Terms

• Tax Increment Financing (TIF), An economic development tool where the increase in property tax revenue generated by development in a designated district is captured to pay for infrastructure improvements in that district.
• Property Tax, A tax levied on real estate (land and buildings) based on assessed value. Property taxes are the single largest revenue source for most U.S. city governments.