Shifting State-Level Economic Development Tools towards Strategic Investments

The traditional approach to state-level economic development has often included a reliance on tax incentives. These incentives, which can include property tax abatements and job creation tax credits, are offered by a state to induce a business to relocate, expand, and invest. The anticipated return on incentive is increased income or employment. However, research examining these state-level practices has documented the relative ineffectiveness of an incentive-focused economic development strategy.

For example, research from the Institute on Taxation and Economic Policy showed that approximately ninety percent of hiring and investment decisions subsidized with tax incentives would have occurred even if the incentive did not exist. A recent study from the W.E. Upjohn Institute for Employment Research found that many states did not strategically target their use of incentives to attract growth industries and those with higher wages. The study also found limited correlation between states which more heavily utilized tax incentives and increased economic growth.

Given this evidence base, states are increasingly shifting their economic development strategies.

As one of his first acts as governor this year, Delaware Governor John Carney created an advisory group to analyze the state’s economic development efforts. The Delaware Economic Development Working Group (DEDWG) recommended overhauling the state’s current incentive process. Rather than offering incentives through the Delaware Economic Development Office (DEDO), the working group suggested shifting responsibilities to a public-private effort called the Delaware Prosperity Partnership (DPP). The partnership is structured as a nonprofit with funding from both the public and private sector. DPP aims to engage public and nonprofit stakeholders to carry out programs and initiatives focused on strengthening the workforce and providing technical assistance to existing Delaware companies.

“If successfully executed and adequately funded, a new partnership has the power to be transformative for Delaware,” the DEDWG report states. “Employers will have access to a broader and deeper pool of talent to drive innovation. Delaware will become a destination for entrepreneurs and innovative people. The state’s finances will be strengthened and tax base will be expanded. Underserved neighborhoods and communities will be invigorated.”

Indiana is taking a similar approach with a broader focus on developing people, places and existing businesses. A notable effort toward this goal is the Indiana Regional Cities Initiative, which launched in 2015. The goal of the initiative is to make Indiana a destination for talent, starting at the regional level. Seven regions submitted applications for state funding, three of which were selected to receive $42 million. Indiana is diverting those resources into targeted, regional economic development projects that will lead to immediate job creation and economic and business development. It is an example of how state government can be proactive with its economic development resources.

Indiana’s North Central region, home of South Bend, is focusing on becoming a tech hub where local residents can learn to code. It is leveraging programs at three nearby universities to build the local tech community, and transforming the old Studebaker assembly plant into an innovation hub with space for manufacturing, tech firms, business incubators, training and education.

Northeast Indiana is investing in becoming an arts and culture hub that attracts young, talented workers. The region’s Road to One Million Plan encompasses 41 regional economic development projects, including a trails network and riverfront development in downtown Fort Wayne. The strategy will have a ripple effect for people of all socioeconomic backgrounds.

“Borders don’t matter,” says John Sampson, CEO Northeast Regional Indiana Partnership. “Momentum has to lead to better earnings, better wages, more per capita income—it matters at a personal level.”

Southwest Indiana has honed in on 19 regional economic development projects, including the creation of a medical research center in downtown Evansville and funding the New Harmony Food to Table & Arts Project that will convert a vacant high school into an educational center for the production and processing of local foods and arts.

The shift toward developing people and places benefits inner cities. Rather than trying to recruit out of state businesses, there’s a growing emphasis on working with existing businesses to identify their workforce needs and then responding by training local workers for those skills. North Central Indiana’s effort to train inner city residents to code is one such example.

Tax incentives will continue to be a component of state’s economic development toolkit, but the fact that so many states are exploring innovative economic development tools and strategies is a promising trend.