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Keys to Municipal Economic Development Success: Five ways not to kill your community

by | Feb 1, 2023 | Community Development

Municipal Economic Development: In my extensive travels across North America the past year, I made an interesting discovery that might surprise or even shock you. It was a discovery that supported my own growing suspicions about our obsession with lowering corporate tax rates in communities to attract businesses. 

All of my numerous meetings confirmed that lowering municipal tax rates is not the economic magnet it used to be. Realistically, it probably never was very effective at doing much more than fostering a race to the bottom as communities lowered their mill rates to beat their neighbors to become the ‘cheapest’ community. We get what we pay for. Regardless, even if it was once upon a time successful at some level, it certainly isn’t now.

That was apparent to me after speaking with knowledgeable people including economic development officers, chambers of commerce executives, and officials involved in selecting sites for businesses. Every one of them in every place I visited confirmed my suspicions that out of the five factors that determine whether a person or company will invest in your community, taxes ranked fifth. Dead last. Taxes are not as important as they used to be. What comes in at the top of the list will likely surprise you.

Before we get to that, let’s examine why taxes are less important than many people think in regards to municipal economic development. There was indeed a mindset permeating the last 50 years that the lowest tax rate possible was the most important objective to grow your economy. That mindset stretched across political jurisdictions in North America whether they were federal, state/provincial, or municipal. If we just lowered taxes, investment would come.

You could certainly point to some success stories, where it appears the lowest taxes won the day, but those stories are likely to be much more complex than you’d think. Indeed, there are jurisdictions where taxes are low, and they cite that as the reason the economy is booming. However, in following up on those claims it is usually a case of mistaking the effect for the cause. Those jurisdictions usually have a predisposition to exceptional economic opportunities or the good fortune of natural resources that caused the growth of their economy and tax base, which then allowed the government to lower taxes. Lower taxes were the result of economic growth, not the stimulant for it. The low taxes didn’t cause the growth, they were the result of it. 

Practically, it’s like how we often wait to have more energy so they can work out, when in reality working out is what gives us more energy. Having more energy doesn’t cause you to work out. Working out causes you to have more energy. Low taxes don’t drive the economy. Low taxes are the result of a prosperous economy.

Research on municipal economic development tends to back this up. For example, a report entitled Rethinking Property Tax Incentives for Business by the Lincoln Institute of Land Policy concluded that companies choose a location based on many factors, not simply tax rates.

“Firms consider dozens of factors during site selection, but government officials rarely know which factors are most important,” says the 2012 study. “They may feel compelled to offer tax incentives since it is one of the few location factors they can influence directly. Policy makers may think that tax cuts and incentive offers are decisive, but this assumption is often wrong. When businesses lobby for tax breaks, they have a clear motive to exaggerate the importance of incentives, because otherwise they are unlikely to receive any breaks. In fact, evidence shows that in some cases businesses negotiate for tax incentives after they have already chosen a location.”

Of course, proponents of tax cuts will argue they do in fact work in favor of municipal economic development. However, there is a caveat to that argument, too. A 2018 report from the Kellogg School of Management entitled Does Lowering the Corporate Tax Rate Spur Economic Growth? said, “cutting the corporate tax rate can, indeed, spur growth—but only if the current rate is exceptionally high.” For example, if your community and surrounding neighbors have a corporate tax rate of 35 percent, you could attract businesses by lowering it to 10 percent. But if you and your neighbors all have a rate of 10 percent, lowering it to five percent won’t make much difference.

Communities are starting to realize cutting their rates simply ends up in a race to the bottom to attract businesses, thereby strangling their ability to pay for municipal services. Ironically, those are the same services they need to attract business, and people.

As a 2020 report from the Journal of Economic Perspectives pointed out, “To the extent that lower corporate taxes are financed by reduced public services, a corporate tax cut may have adverse effects on productivity. In Kansas, for example, dramatic business income tax cuts reduced state revenues by $700 million, leading to underfunding of public schools, increases in sales taxes, and decreases in infrastructure spending.”

Adding to the problem was that Kansas was in a race-to-the-bottom tax-cutting war with its neighboring state, Missouri. The two realized they needed to end the war, but old tax-cutting habits die hard. “In 2019, Kansas and Missouri came to a truce: they would not offer tax incentives for firms moving from the other side of the border in Kansas City. However, both states rushed to finalize large incentive deals right before the truce was enacted.”

So, if cutting taxes is not at the top of the list (it comes in 5th out of 5 factors) to attract businesses, and could actually be bad for your community, what are the factors that rank higher?

Number 4: Infrastructure. This includes water, wastewater, roads, rail, and airports. But even infrastructure is not as important as it once was as the world changes to local manufacturing and just-in-time production, especially given how much transportation costs are increasing while logistical coordination is improving.

Number 3: Workforce and Housing. These two are inextricably linked because housing is a critical issue in every corner of this continent. Without affordability and diversity in housing you cannot attract a diversified workforce and without a diversified workforce you are not likely to attract many new businesses and industries. Businesses and industry look to locate where people (the workforce) already live, and particularly, where they love to live.

Number 2: Quality of Life. In simple terms, if you have to leave town to take your kids to swimming lessons then you’re probably going to buy groceries in that neighboring town.  Conversely, if you have to drive somewhere to get groceries then you are probably going to take your kids to that swimming pool while you shop. Either way, eventually you will move to the community with the grocery store and the swimming pool.. It’s a simple example of municipal economic development but I think you get the point.

And there’s a crucial related point: Economic development and community development must go hand in hand. It’s an argument I have been making for years. A few years ago, I was working with a community that over time had lost a couple of major industries and several hundred jobs. One of the folks from the town told me they just needed to attract an industry that would create a couple of hundred new jobs. I delicately explained to him that they weren’t going to be able to attract an industry that would create a couple hundred jobs for two reasons. First, there weren’t 200 unemployed people in the community available to work. When the original jobs had been lost, those newly unemployed residents moved away almost immediately, along with their families. Second, the community wasn’t offering a good enough quality of life to retain people or to attract new people. No business was going to invest in a place where people didn’t want to stay.

When a business or industry is looking to locate in the community it’s important to have an existing workforce they can draw from. Not having an existing workforce almost guarantees that you will not be able to attract any business or industry. It’s pretty simple really. Baby boomers would move to where the jobs were, but younger generations are moving to where they want to live and the jobs are following them. If your community does not have a good quality of life and people don’t want to live there then a new business won’t want to be there either.

Number 1: Collaboration/cooperation. By that I mean both collaboration between neighboring municipalities and cooperation within the municipality itself. Investors and site selectors have told me they will drop by school board meetings and council meetings to see how well the community functions and how well it works with neighboring communities. 

The case they made to me every time was that if the community can’t work together and collaborate with others, then the other four items on the top-five-factors list cannot be addressed properly. Communities in a region that can’t work well together won’t be able to address quality of life issues around services and businesses, and municipal economic development will be affected. They won’t be able to address regional housing issues that can attract the workforce. They won’t be able to deal with the issues around water and wastewater and other infrastructure needs. And that usually means that the quality of life will be reduced, the workforce will be reduced, infrastructure will be missing, and that means the taxes will be higher. Or, as one person so succinctly put it, if they aren’t higher now, they will be going higher soon, because they won’t attract investments, businesses, industry, or people. In other words, a lack of collaboration makes it impossible to address the other issues.

If you have ever heard me speak, you know I believe a lack of collaboration/cooperation between and within municipalities is the plague of the 21st century for our communities. A failure to put down your egos and focus on cooperation and collaboration is the one thing guaranteed to ensure your community will fail. I guess that’s why my new presentation on collaboration and cooperation is so popular these days. My biggest piece of advice to communities, and my last word on the issue, is to put down your ego, reach out a hand and get to work on collaboration, because collaboration is the first step to making your community and your region stronger.