Do Incentives Buy More Investment… or Better Rankings?

by James A. Bacon

It has long been evident that the actions of college and universities boards are informed by the U.S. News & World Report rankings of higher education. If the U.S. News methodology gives brownie points for greater selectivity in admitting students, colleges and universities will adjust their policies to appear more exclusive. If U.S. News tracks the alumni-giving ratio, colleges and universities will step up efforts to extract contributions, no matter how small, from their alumni.

It never occurred to me that state governments might conduct economic development policy on the same basis… until the conjunction of two bits of news.

First, it appears that while I was frolicking in Spain and France during the past week, Pollina Corporate Real Estate released its list of the Top 10 Pro-Business States for 2012. After commanding the No. 1 spot last year, Virginia fell to No. 2 behind Utah. That news follows the publication of CNBC’s annual best state for doing business, in which Virginia slid from No. 1 to No. 3. Unless you subscribe to Virginia Business‘s daily email, you no doubt missed the Pollina news. The McDonnell administration issued no press release on the ranking, as it has in the past, perhaps feeling that sliding in two separate rankings did not look like an achievement worth bragging about.

But the McDonnell administration did release a press release today, touting the fact that the state has finalized the guidelines for a newly created Agriculture and Forestry Industries Development Fund (AFID), which aims to dispense $2 million of incentives over two years in support of value-added agricultural and forestry projects.

What’s the connection between the two news events? Let’s start with this reporting by Virginia Business:

Virginia maintained its rank of #1 for incentives and economic development agency, with the [Pollina] report citing the Virginia Economic Development Partnership “as one of the finest economic development organizations in the nation. A close examination of Virginia’s programs reveals a very well-balanced understanding of economic development.”

Ah, hah! Becoming a “Best State for Business” means handing out incentives.

Could that have anything to do with the decision to create a $2 million fund targeting agribusiness and forestry? Well, here’s what Lieutenant Governor Bill Bolling, Virginia’s jobs czar, had to say in today’s press release:

The AFID is a powerful new tool in Virginia’s already impressive economic development and jobs creation portfolio of incentive options and will further enhance our ‘best for business’ reputation.

There you have it, folks! The McDonnell administration is allocating economic-development resources in order to influence Best State for Business rankings!

There is abundant academic literature to suggest that such arcane, industry-specific incentives don’t do much good. The smaller the incentive, the less likely businesses are to know about them and to base capital spending decisions on them. On the other hand, maybe Virginia really isn’t trying to buy business with its incentives. Maybe it’s just trying to buy better Best State for Business ratings!

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  1. DJRippert Avatar

    As a CEO running a business with operations in Virginia, Massachusetts and California (with smaller operations in Florida and Colorado) – I can say from experience that Virginia is far from the best state in which to do business. In fact, of the states where I operate Virginia (on a complete scorecard) is second to last.

  2. Playing the incentive game is stupid. Government should concentrate on operating efficiently and effectively with low, broad-based taxes, targeted regulations that address the public health, welfare and safety. Government institutions should concentrate on their missions and strive to operate efficiently.
    Transportation needs to be linked to land use and not used for economic development (read enrich those making big campaign contributions and speculating on investments in land). Transportation agencies need to become network operators striving for the most efficient use of resources.

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