Cost of economic investments impacts public policy
Economic development is among the most pressing issues facing New Mexico. How we achieve the growth required to raise our economic performance is central to the current public policy debate. The focus is on tax incentives, economicdevelopment funds, funding of education and training, as well as infrastructure investment and other tools.
Both public and private investments facilitate growth. The question then is how government approaches these opportunities.
At one extreme, government can simply ignore private-sector development and passively accept its role in managing economic growth by providing adequate education, public safety/health and infrastructure funded by taxes and fees. This passive economic development posture for government has been broadly rejected in our current economic circumstance.
Discussion thus centers on the role of government in facilitating and supporting private investment and development decisions. Questions with respect as to how we measure public costs associated with development initiatives are raised. Concerns for transparency in the confusing world of government finance and accountability in large-scale economic development projects are common.
In other words, how should government determine priorities in its use of the limited resources available for economic development?
Government incentives for economic development have real public costs. Government revenues may be expended on infrastructure, training, education, public safety, public health ... and on tax incentives. In other words, government expenditures and tax incentive programs for economic development directly reduce revenues available for all other government programs. These are the public costs of economic development.
The logic is that taxpayer cost burdens are offset by the benefits of expanded economic activities. The difficulty lies in that fact that, while expanded job opportunities and tax revenues are important benefits, they are uncertain and not immediately realized at the time the commitments to the economic development incentives are offered.
Crucial to government management is a balanced budget. State and local governments must match revenues and expenses each fiscal year.
Government can only facilitate. Real economic development is provided by private businesses with concerns about cash flow, income statements, balance sheets and owner interests Opportunities are analyzed based on actual costs and revenues realized. Property-tax abatements are monetized by the developer in the form of reduced actual costs. A private developer is certain to put “pencil to paper” in analyzing an investment decision. Shouldn’t government do the same? Government incurs public costs when it supports economic development projects — costs which can last decades. These public costs are borne by the other citizens and taxpayers who provide annual government revenue.
A “package” of economic development incentives decreases government revenue each year a developer pays less than their otherwise applicable share in tax obligations.
A business offered economic development incentives may require many years to produce a net economic return to the public investment. In other words, it may be decades before citizens and taxpayers are compensated (in the form of a sufficient expansion of economic activities) for the costs they incurred in support of the project.
In the meantime, government revenues are reduced by tax or fee abatements and infrastructure costs. Through time, the cumulative incentives granted impact annual revenues available to meet growing government obligations. Economic growth also requires expansion of government’s obligations to its growing base of citizens and taxpayers.
Government accounting standards require annual financial statements. A recently adopted standard (GASB 77) requires that governments report tax abatements. A key consideration in evaluating the financial health of a government unit is its ability to meet its expenditures with the revenues it receives. This transparency characteristic is evaluated by the financial analysts and impacts bond ratings and financing costs. Importantly, it is measured relative to other government units.
At one extreme, the government’s decision calculus is simple. For example, the subject property has fiscal value only as raw land, and the economic development is all “new money” in the economy.
However, a 30-year abatement of taxes (for example) has clear implications in each and every year. Government must look at its annual financial obligations and consider how revenues are impacted by the aggregation of abated tax revenues. Too much abatement of tax revenues places excessive “public cost” burdens on the remaining citizens (and taxpayers). If these cost burdens are disproportional to the expanded economic base obtained by economic development initiatives, it weakens governments’ ability to fulfill its obligations.
Discussions of economic development incentives must focus on the cumulative public costs borne each year and measured against the government unit’s specific annual obligations to its citizens.
Next week: Measuring the public costs of economic development against the public benefits John Tysseling