Peter Reichard: Development tax breaks need oversight

How well are Utah’s local governments managing economic development incentives?

(Rick Egan | The Salt Lake Tribune) The city has allocated a key piece of cash to proceed with building a new TRAX station at 650 Main with the help of donations from developers with big projects in the neighborhood, Tuesday, Dec. 8, 2020.

It looked like a stroke of genius. Back in the 1950s, California officials, looking to fund economic development projects under tight budget constraints, created a mechanism known as tax increment financing, or TIF. The idea was to pledge new (or incremental) tax revenue generated from a project to make the project itself possible. It would be a clean win for the public, because the only money to be spent would be money that would not otherwise have existed.

In the ensuing decades, as more states passed laws allowing TIFs and the uses of TIF expanded from public infrastructure to private assets, flaws in the theory began to crop up.

In some instances, developer requests, rather than a set strategy, dictated the use of incentives and created a kitchen-sink approach. In other cases, neighboring governments competed for the same project, creating a race to the bottom at taxpayer expense. Some officials didn’t bother to monitor whether developers were keeping their promises or whether local strategies were making progress. Incentives were provided unnecessarily, or at unnecessarily high levels, or for too long.

In a few cases around the country, incentives were even granted to projects that had already broken ground, meaning that the project would have happened without the incentive. And because many governments kept these tax expenditures off the balance sheet, citizens had no idea that they were in effect subsidizing other taxpayers.

These are worst-case scenarios, and Utah’s local governments have by and large put in safeguards to avoid them. But these scenarios are not merely theoretical. Such missteps litter the nation’s economic development files.

To help Utah’s governments optimize their use of TIF and protect the public from missteps, the Utah Foundation launched a multipart economic development incentive series. The latest installment, “Insights on Incentives,” addresses the challenges facing local governments.

In this context, we set forth an analytical framework with the premise that any incentive program should be strategic, coordinated, effective, efficient and transparent. Economic development officials should have clear aims for their incentive programs, avoid withering competition with neighboring jurisdictions, measure progress to ensure they are meeting their aims, grant incentives on the most favorable terms possible for the public, and provide key information to citizens to ensure accountability.

We surveyed local governments across Utah and compared trends here to the nation at large. This revealed that Utah governments are twice as likely to use tax increment financing to fund economic development compared to their national peers, suggesting that it is critical to optimize the use of TIF here.

There are some clear strong points within Utah — as well as issues that merit scrutiny by local officials.

Utah’s local economic development officials report fewer barriers to economic development in their community compared to officials nationally. They are more likely to have a written economic development plan compared to officials nationally. Local economic development officials in Utah report lower levels of competition than officials nationally for jobs and tax base among neighboring local governments. Interestingly, however, they also report lower levels of intergovernmental cooperation.

While economic development officials in Utah are less likely to measure the success of their incentive programs than officials nationally, they are far more likely to require performance standards from incentive beneficiaries.

The Utah Foundation’s analysis also revealed that local economic development officials in Utah take a variety of analytical approaches — with significant variation in rigor — when evaluating whether an incentive investment is worthwhile.

And greater transparency appears to be in order. Based on the Utah Foundation’s analysis of national accounting standards regarding the reporting of incentives, various local governments appear to be misunderstanding what is required of them.

Providing incentives is usually a tricky business that requires constant monitoring and refinement. In multiple ways, Utah’s local governments are ahead of the curve. But as they look to better serve the public and build confidence in their economic development investments, many governments still have work ahead.

Peter Reichard

Peter Reichard is president of the Utah Foundation, a nonpartisan, nonprofit public policy research organization. Reach him at peter@utahfoundation.org. Find the report, “Insights on Incentives: Optimizing Local Approaches to Tax Incentives in Utah,” and the rest of the Economic Development Incentives Series at utahfoundation.org.