Politics, Economics & Media Wreaking Havoc on Economic Incentive & Site Selection Strategies
by Kelley Rendziperis, on Feb 20, 2019 2:32:15 PM
The 2018 midterm elections and economic policies under President Trump wreaked havoc on several of Site Selection Group’s projects. Not only are we seeing companies pull back and put projects on hold because of tariffs and uncertainty around trade agreements, but even amid finalizing economic incentive packages, we have dealt with uncertainty due to changing politics. Newly elected governors, U.S. representatives, U.S. senators and appointed economic development directors may have different objectives and a different view on economic incentives.
Just when we all thought the nagging question of where Amazon would choose to locate its second headquarters was over, here we go again. Amazon announced that it will no longer build its headquarters in Long Island City, Queens, New York, after state and local politicians opposed its presence and the $3 billion of city and state economic incentives offered to attract the project.
For those wondering if economic incentives matter and suggesting that Amazon would come to New York regardless of incentives, apparently Amazon was willing to walk away without them. Which begs the question of which is the next city, if any, to gain 25,000 jobs with an average wage of $150,000 and billions of dollars of investment? As we already know, economic incentives are a major consideration for Amazon in answering that question which may be heavily influenced by changing politics in other states.
Nine Democratic governors gained control over previously Republican-controlled or independent governorships in Guam, Illinois, Kansas, Maine, Michigan, Nevada, New Mexico, U.S. Virgin Islands and Wisconsin. while Republicans gained governorship over Alaska.
Foxconn’s highly publicized economic incentive award may have heavily contributed to the loss by Scott Walker in Wisconsin. The recent negative press announcement detailing Foxconn’s decision to curtail its original plans to build a $10 billion liquid crystal display factory in Racine County and create 13,000 jobs has only validated Walker’s opponents.
Just last week, General Electric Co. announced that it will scale back its planned Boston headquarters. Instead of 800 jobs, the company will create 250 and is selling property which would have housed a 300,000-square-foot building. The Commonwealth of Massachusetts awarded GE $120 million of economic incentives, but now the company will be forced to pay back $87 million, while continuing to commit to making $50 million of charitable contributions in the state.
Amazon, Foxconn and GE have different reasons for curtailing or canceling their projects. However, opponents of economic incentives will only view these decisions as another reason why politicians should not offer economic incentives or “subsidies” to companies to spur economic growth in their communities. That kind of simplistic argument may be missing a few major considerations:
1. Benefits to the community
The premise of offering economic incentives is to entice a company to place a competitive project in a particular jurisdiction. Winning a project can benefit a community in several ways and truly be a win-win for the corporate citizen, as well as the state and local government. For a discussion of how properly structured economic incentives can benefit a community, please refer to my article 3 Ways Economic Incentives Can Benefit Communities . Some argue that Amazon’s presence could have significantly helped to improve the city’s transportation system.
Since economic incentives are increasingly publicized, many jurisdictions have commenced, revamped or continued to report on the performance of their programs and whether they are meeting the delineated intent and objectives. For more on government oversight efforts, please refer to my article Economic Incentive Programs at Risk as Public Criticism and Government Oversight Increases. In addition, many communities are upfront about the awards they offer companies, including presenting them at public meetings, issuing press releases or posting online applications and compliance documents. When Amazon issued an open request for proposals to major metros in the United States that could offer them their key location criteria for its second headquarters, which included economic incentives, some communities publicly released what they offered Amazon. In the end, New York and Virginia detailed the economic incentives that would be available to a split HQ2. However, even with that transparency, New York politicians argued against awarding economic incentives, presumably due to politics.
In addition to transparency, opponents of economic incentives also demand accountability. GE’s deal in Massachusetts was also highly publicized and transparent. In addition, the state structured the award to require GE to payback incentives if they did not meet their commitments, in other words, clawback provisions. As mentioned above, GE will be forced to payback $87 million. Most economic incentive awards these days are structured as performance based (the company only receives economic benefits upon meeting their commitments) and they may also include clawback provisions.
Currently, economic incentives have become expected by corporate executives for creating jobs and making capital investment. Thus, even though incentives are highly publicized and criticized, they are unlikely to disappear any time soon. Ensuring awards are structured properly is vital to a successful partnership; however, it seems that even when economic incentives are used to win competitive projects and structured only to award commitments which are achieved, there will still always be opponents of any kind of economic incentive. This belief ignores the positive impact that a project can make in a community and narrowing of a cost differential versus another community. Opponents should not be quick to dismiss economic incentives to attract investment because most projects result in increased state and local revenue, employment opportunities, infrastructure improvements, charitable and civic contributions and oftentimes enhanced curricula at local educational institutions.