How to think about incentives ROI

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Figuring out if an incentives package is a good deal that will generate the expected returns for your community is not easy. While many organizations are asked to calculate ROI (return on investment), what does that actually mean for economic development? Assuming communities are looking beyond a simple financial return, what should be measured? We propose a three-pronged approach to considering incentives ROI that takes into account community and economic outcomes.  

Project Benefits

Economic developers should be able to describe the benefits of a proposed project to the community in a few clear sentences. Opportunities are not “good” just because they exist. It should be clear why a proposed project is a good investment and how it fits the community’s economic development strategy.

In addition to explaining what the project is, the typical project benefits include number of jobs, quality of jobs and expected wages, total investment, and location (where the project will be and where the benefits will occur). Programs may have other objectives, perhaps related to sustainability, entrepreneurship  or equitable economic development. Other important factors include the project’s timing (when it will begin, when the investment and hiring will occur, and the expected lifespan) as well as the level of risk/likelihood of success.

Fiscal Impact

The tax and budgetary implications of incentive decisions for state and local governments should be analyzed to determine how taxes anticipated to be generated will compare to the expected cost of the incentive and any additional costs of service required by the proposed project.

Timing of expenses and anticipated revenues is important, as is the timeframe over which both will occur. Fiscal impact analyses should clearly explain who will be paying taxes (new residents? the company?) and whether the estimates are based only on the new jobs created directly by the project or also include indirect and induced job counts.

Economic Impact

Many communities run economic impact models to trace the flow of money throughout the economy after the initial investment and estimate the contribution of that investment to the wider economy. When conducting an impact analysis for new investments, our colleagues at Impact Data Source suggest focusing on employment and household earnings:

For the typical economic development impact analysis for a new business locating or expanding in a community, employment and household earnings are the most meaningful measures. A new business will generate an impact on economic output and value added but the scale of that impact typically doesn’t warrant the use of economic output or value added. This is to say; these measures won’t provide any meaningful insight to the project. The easier-to-comprehend impacts of employment and household earnings are the most instructive measures to analyze and report.

Establishing a clear, consistent ROI process backed by solid analysis makes it easier to communicate with stakeholders, build support for promising projects, and steer away from bad ones.

 

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