1996-1997 Essay Contest

Second Place Essay

Targeted Incentives Hit the Mark

Dan Borkenhagen
White Bear Lake High School
White Bear Lake, Minnesota


The Wild Wild West was a land of gold, buffalo, Native Americans, cowboys, railroads and economic incentives. Yes, economic incentives. This land was tamed, not by cowboys, but by towns and railroads built with targeted incentives from the federal, state and local governments. You can see from this example that incentives reach deeply into the history of our country. Today we are confronted with the issue of targeted incentives by states and whether or not the federal government should ban their use. It is not an easy question and both sides raise valid points. Opponents of targeted incentives argue that they are merely being used as a tool of economic warfare in a zero-sum game enticing big companies from one state to the next. Proponents of incentives counter that they are a valuable tool and when properly used spur economic growth and efficiency.

In this essay, I propose that economic incentives should not be banned by the federal government. I will argue this by showing that targeted incentives are a great asset to individual states and communities, that it is not a zero sum game and, finally, incentives should be left to the states not the federal government to deal with.

Targeted incentives play a key role in the economic development of states and communities. One need look no further than South Dakota to see the benefits reaped from them. Up until they started vigorous incentive programs the population was dropping and they were facing large budget deficits (Buus 5A). Then in the 1990s pro-business legislation expanded rapidly, the population increased and they had budget surpluses (Buus 5A). Over 29 public incentives were created with $33 million in exemptions, grants and loans. Over 10 years an estimated 4,847 jobs will be created and retained and an estimated $800 million payback in the form of purchased land, construction, equipment, property valuation, payroll and benefits (Buus 6A). The list goes on. Kansas City gave incentives in the form of rebates on increases in property taxes that spurred new construction, expansion in businesses, new technical companies and an entertainment center to settle down in Kansas City (Christian R3).

All these numbers speak very strongly for incentives and so do the numbers in studies of these targeted incentives. A nationwide study of targeted incentives showed that states that spent more on incentives showed stronger growth in manufacturing than those that didn't (RoseA2). It showed that an estimated $10 per worker increase in incentives caused a 12 percent growth in manufacturing (Rose A8).

These numbers are pushed aside by opponents who argue that these increases don't reimburse us for the loss in funds that could go to public goods. I believe, however, that the opportunity cost of these programs is well worth it. Empirical evidence shows that revenue losses are at least partially offset by individual income and sales tax increases (Mattey and Spiegel 50). Many of these incentives are also in the form of infrastructure development. This is a public good that is not limited to the company, it benefits the entire area. Incentives have given us public schools, land grant colleges, state universities, hospitals, laboratories and high-tech enterprises (Rivlin 20). These incentives in infrastructure have also helped bring the Mall of America to Minneapolis. Without the infrastructure development the Mall of America could not be (Wieffering l3). Many scorned the incentives used to help get it started and predicted failure, but it easily made its projections of 35 million visitors and $600 million in the first year (Wieffering 13).

These incentives are not just part of a zero-sum game, moving jobs from one state to another. They allow economic development techniques that spur creation of new jobs and new industry. Incentives can create interfirm dependencies and rivalries that upgrade economic vitality and competitiveness as well as investment (Toft 39). These incentives can also be targeted at small businesses or small technical firms which need loans to grow and become more efficient (Bartik 44). These incentives are also vital in allowing states to compete with countries from around the world for firms which can create new jobs and industry in a state (Friedman 27).

These incentives can also be used in development plans which target missing ingredients in a local economy (Friedman 25). They can be used to target firms which would complement each other and form "industry clusters" where you can exploit "agglomeration economies," which increases efficiency of production by concentrating these industries in a geographic location (Mattey 51). In the example of the Mall of America, incentives were used and yet nearby malls show little reduction in sales. This shows that the Mall has indeed created a new market and new jobs in Minneapolis. It didn't. just move jobs around (Wieffering 14). They can also be used to target. companies which can provide social benefits by adhering to minimum wages, targeting their employment and following environmental standards (McEntee 42). Congress has already developed "enterprise zones" based on this idea (Fox 54). President Clinton has also called for expansion of enterprise zones and incentives to companies that hire welfare recipients (Mitchell R9).

Despite this mountain of evidence for incentives, some still demand action to stop incentives; however, the federal government shouldn't control incentives, and states are already taking steps to control the existing problems. Many states are discussing disclosure of the bidding process for incentives to the public (Fettig 10). Many states are also doing cost-benefit analysis of incentives such as a study commissioned by Ohio attached to state incentives (Fettig 18). There have also been conferences to discuss the mitigation of escalation in incentives such as the Great Lakes Conference (Fettig 18). States are dealing with the so-called winner's curse by introducing clawbacks which cut off payments or demand payment back on incentives. Indianapolis and New York City already have such programs (Phillips A2). In fact 75 percent of incentive packages now have some form of clawback (Phillips A2).

There are also many questions as to the federal government's ability to end targeted incentives. Many believe that states would get around the laws, and cases challenging incentives would only crowd the courts (Reich 29). There was also a case in North Carolina where incentives were challenged as unconstitutional, and it was struck down by the state Supreme Court (Fettig 15).

As you can see this is a complicated issue. I believe the evidence presented has shown how well incentives work in individual states and how they can work in a positive-sum game by increasing efficiency and spurring new industry. I have also shown that it would be improper for the federal government to take such drastic measures on an issue states are already dealing with.

Bibliography

Bartik, Timothy J. "Eight Issues for Policy Toward Economic Development Incentives." The Region June 1996: 43-46.

Buus, Jim. Letter. "Incentives Don't Just Lure Jobs, They Create Them." fedgazette October 1996, 14.

Christian, Shirley. "Kansas City is Rediscovering its Downtown Area." New York Times 6 October 1996: R3.

Fettig, David. "A Report From the Battlefield." The Region June 1996: 8-15.

Fox, Justin. "The Little Policy Idea That Could." Fortune 11 November 1996: 54.

Friedman, Miles. "Governments Can Use Incentives Rationally." Economic Development Review Fall 1994: 25-28.

Mattey, Joe, and Mark Spiegel. "On the Tax Efficiency Effects of Tax Competition for Firms." The Region June 1996: 50-51.

McEntee, Gerald W. "The Problem With State Bidding Wars and Some Possible Remedies." The Region June 1996: 41-42.

Mitchell, Alison. "Job Ideas for Inner City." New York Times 15 Aug. 1996: R9.

Phillips, Michael M. "Localities Force Firms to Keep Promises." Wall Street Journal 26 June 1996: A2 and AI 1.

Reich, Robert B. "Bidding Against the Future?" The Region June 1996: 26-30.

Rivlin, Alice. "An Economic War." The Region June 1996: 20-2.5.

Rose, Frederick. "Growth Tied to State Incentive Programs." Wall Street Journal 8 April 1996: A2 and A8.

Toft, Graham S. "Doing Battle Over the Incentives War: Improve Accountability but Avoid Federal Mandates." The Region June 1996: 37-40.

Wieffering, Eric. "What Has the Mall of America Done to Minneapolis?" American Demographics February. 1994: 13-16.

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