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Economic Development Spending: Let’s Find Out if It’s Effective

In the June issue of Government Finance Review, we have a column titled “Are Tax Incentives Good for Cities and States?” Though the headline, which we wrote, leaves the question pretty much open, readers of the piece will discover that based on a number of interviews, we discovered that the answer is pretty much “no.” To sum up, in the words of Shayne Kavanagh, senior manager of research at GFOA’s Research and Consulting Center, “There is compelling evidence that these things are often not effective.”

With that in mind, we were intrigued to read an excellent report that came out last week from the Citizen’s Budget Commission, a nonprofit civic organization that focuses on the finance and services of New York City and New York state government. It was titled 11 Billion Reasons to Rethink New York’s Increasing Economic Development Spending.

The 11 billion in the title referred to the total dollars spent on economic development in New York’s state and local governments – a number that the report indicates “likely will increase more in the coming years, potentially exceeding $13 billion in 2025.”

Though the report focuses on New York, we know that its basic conclusion is true in many other places: There’s insufficient evidence that this spending is effective. As the report states, “Despite improved disclosure about individual projects, state and local economic development spending continues to increase without sufficient evidence that these programs cost-effectively create jobs or are more beneficial than alternative uses of the funds.”

The report calls for data-driven evaluations about the effectiveness of incentives and grant programs and we agree entirely. But there may well be political reasons why such research isn’t done, not the least of which is that elected officials can get lots of mileage out of announcing major economic development initiatives, and they may not want to know exactly how well they’ve panned out.

As we wrote in Government Finance Review, “It’s difficult for elected officials to take credit for many of the things that genuinely attract new businesses, like good education systems, a willing workforce, local amenities like golf courses and, naturally the weather. Even the most hyperbolically inclined politician in the world can’t take credit for blue skies and a temperate climate.”

It feels like this may be a good time for greater demand for accountability when it comes to economic development spending. Increasingly, governments – both in legislative and executive branches – are demanding evidence that new programs work before they fund them. Indeed, the federal government has been pushing for evidence. According to a White House statement, “Since its first week in office, the Biden-Harris Administration has prioritized evidence-based decisions rooted in the best available science and data.”

Getting back to the CBC report, three of its recommendations for New York State and its localities are that they “Rigorously evaluate existing incentives and programs to determine their effectiveness; Narrow, shrink, or eliminate programs that are not proven effective; and Adopt performance-based incentives whenever possible.”

Sure make sense to us.


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