Dollars and Sense: Incentives will not make a bad project good

By JAMES DEDES / Guest Columnist

Economic development incentives are once again in the spotlight following the recent announcement of Alabama’s record $811 million package offered to recruit German steel maker ThyssenKrupp to South Alabama. These incentives, which include direct financial aid and tax abatements, are widely viewed as appropriate given the anticipated $3.7 billion investment by the company. With the possible creation of over 2,700 new direct jobs, this announcement rises far beyond the definition of a “good project.”

As we observe these stratospheric incentives at the state level, it is worth noting that many of the evaluation criteria are also applicable at the local level.

Communities should continually evaluate incentive requests to determine their project-specific purpose. Why are the incentives needed? What types of jobs are being created? What is the capital investment of the company? And, in my opinion most importantly, what protections are in place to recapture public funds if the company does not perform as promised?

These so-called “clawback” provisions in incentive agreements, which were quite rare a few years ago, are being used with increased frequency nationwide.

As companies increase their use of consultants to “shop” for incentives, communities should respond accordingly. Is it reasonable to assume that a company on life support can be resuscitated by a grant, tax abatement or short-term loan?

Incentives will not make a bad project good. Rather, a community should evaluate the request and deliver an incentive that it can afford, is appropriate for the project and responds to the competitive recruitment environment.

The Wall Street Journal recently reported that cities in Northeast Ohio are working together to limit the use of tax abatements to induce companies to move from neighboring communities.

While not realistic in all circumstances, there are clear benefits to coordinating incentive criteria and working together within a county to minimize the impact of “incentive shopping.”

We should keep an eye on Ohio. We might learn something valuable.

James Dedes is executive director of the Shelby County Economic & Industrial Development Authority. He can be reached by e-mail at mailto:jdedes@sceida.org