Should cities offer incentives to individuals?

Dear Mayor:
I’m writing to let you know that my spouse and I have recently decided to relocate to another community. We are in our mid-50’s and have income over $200,000 per year. We plan on buying a house in the city. It will be in the $600,000 range. We are in excellent health and have no children. We travel around the world presenting seminars to leading technology companies. We are considering doing two seminars per year in the city that we move to. These seminars will bring in approximately 100 business leaders for three days.

The city that we will move to will have the following attributes:

  • A first-class conference hotel;
  • Good medical facilities;
  • An airport with connections to an international airport;
  • A college or university within 30 miles; and
  • Ubiquitous high speed internet access.

If your city meets the above qualifications and you are interested in having us as residents, please forward the amount and type of your financial incentives by the deadline stated in the attached data sheet by close of business 90 days from today. We will consider your bid and that of other cities within 30 days of the deadline referenced above and let you know if we select your city.

Very truly yours,

Prospective Residents

*****

Sounds pretty silly, doesn’t it? A high-income couple asking cities to offer them incentives to move there.

But wait. If you’re the mayor of a city that met the qualifications, wouldn’t you want these residents? They don’t have children that have to be educated in your schools. They don’t add much to required city services. The property taxes on their house will add to the city’s revenue. They will bring in visitors who will spend money and stay in hotels that probably have an additional tourism tax. Wouldn’t it be worth offering them something to move to your city?

Let’s say that you do want these residents and that you have a policy of offering incentives to individuals. How much would your incentive be?

Without going through the numbers, one way to determine such an incentive, as a minimum, would be to figure out what their contribution to the city’s revenue minus the city’s cost. If the number is positive, then determine a rate of return on the city’s offering, or investment. If the return on investment meets the city’s desired return, then the prospective residents could be offered that amount in incentives, which could be cash, reduced taxes for a certain period of time or maybe a requirement that they bring a certain about of hotel revenue from out-of-town visitors.

The reason this subject is on my mind right now is – you guessed it – Amazon’s procedure for selecting its second city headquarters, aka HQ2. It invited cities to bid on its final selection, or winner. It says on its website that it expects to “invest over $5 billion in construction and grow this second headquarters to include as many as 50,000 high-paying jobs.” Amazon received 238 proposals from cities, some of which offered incentives in the billions. It then narrowed the list to 20 cities. Check out Amazon’s HQ2 webpage for more a list of the 20 cities and more information – https://www.amazon.com/b?ie=UTF8&node=17044620011

The process has not without controversy. In a January 28, 2018 Wall Street Journal article entitled, “Mayors, Say No to Amazon,” Richard Florida, professor at the University of Toronto and author of several books, including The Urban Crisis, writes:

“At heart the HQ2 competition is a ruse. Amazon without a doubt already has a very good idea of where it wants to put its new headquarters… If the mayors on Amazon’s short list want to stay true to their progressive roots, they should stand together instead of allowing Amazon to divide and conquer.”

The economic development incentives game has changed over the years.

Here’s the way it used to be when it came to economic development incentives: The company will locate a facility in the community if given the requested incentives.

Here’s the way it is now: The company invites several communities to offer incentives and the company will then decide where to locate the facility.

Meanwhile, back to the silly letter above. Mayor, before offering incentives, make sure that there will be a return on investment. Be careful when incentives are not justified.

Is there a case for incentives that do not meet this requirement? The answer is yes. If landing a facility that results in image improvement and long term benefits it may be worth it. One nearby state paid more per job than it would ever receive in benefits. However, it did so knowingly because its strategy was to land an international company that would improve the image of the state and lure other companies to the area. And it worked.

We talk a lot about these big projects, but let us not forget that sometimes one household at a time is rather good economic development for a community.

Just something to think about.

###

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