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The double edge of incentives

Don Cohen

In the business of economic development, among the most common tools communities use to attract new business are economic incentives. Economic incentives usually take the form of breaks on property, payroll or sales taxes, either individually or in combination.

Auto-mobile manufacturers, when they want to move their products, offer rebates and low-interest financing. As many automobile manufacturers have found out, rebates help move inventory but often don’t do anything to improve profit.

However, beyond the automaker’s balance sheet, keeping or gaining market share is an equally worthy goal. Future-oriented communities often think the same way.

Historically, the use of economic incentives has been limited in Eagle County for a simple reason: they haven’t been necessary. When you look at our county’s economy, you see the largest slices of the pie chart dominated by recreation, hospitality and real estate. For the next 10 to 20 years, as long as there’s developable land and reasonable transportation access, it’s a reasonable expectation that these supporting pillars of our local economy will continue to grow.

Then what?

That’s the big question that continues to go unanswered. Because town council and county commissioner seats turn over in four-year cycles, it’s hard for elected officials to think of a future beyond their terms of service. The very nature of both the business and political cycles inherently chokes off bold initiatives and replaces it with timid incrementalism. That’s not much of a worry for a growing county economy that never has envisioned an endpoint. But it’s a very real fear for communities that have hit the wall of economic atrophy.

In The Wall Street Journal (March 9) reporter Dan Morse visited Hazard, Ky., and chronicled the rise and disappearance of a community business bet gone bad. This tale, from the heart of Appalachia is quite instructive.

In 1999 then-President Clinton went to Kentucky to announce the good news. The state had offered over $7 million of incentives to bring a call center to this economic struggling community. The call center company opened two centers in eastern Kentucky that employed 3,000 workers at its peak. Today the call centers are closed and the better quality jobs they created, along with the money those jobs pumped into the local economies, have gone, too.

How could that business have shifted so quickly? Cheap international telecommunications and an even cheaper off-shore work force. Poof. With such a swift change in technology a great community development plan of five years ago is now marked by the tombstones of empty buildings. The call center company isn’t the bad guy here. Competitive market forces pushed them to look for lower cost alternatives. With dramatic improvements in telecommunications, computers and transportation delivery systems, new market opportunities can appear overnight and vaporize just as fast.

Even locally the idea of call centers and “back office” processing businesses have been floated as ideas in broadening our local economy. What may have seemed a reasonable idea in 2001 now seems totally unrealistic in 2004.

I had a similar concern last year in the initial pursuit of a national specialty retailer. The target company has been successfully courted by other communities willing to open their checkbooks for freeway improvements, land and tax breaks. If this company were to decide to open an Eagle County location, it would make big headlines. And if, as it has shown so far in other communities, the company prospers, those communities’ investments will be well founded. But what if there were a change in the market, a national economic downturn, or the company’s unique identity ceased to be a special drawing card? It happens.

In 1991 United Airlines pitted Denver against Indianapolis in a contest to win a coveted maintenance base. The Colorado Legislature threw in the towel when the price tag got to be over a $130 million incentive package, and Indianapolis won. United pledged to hire 7,500

highly paid maintenance workers, and in return Indianapolis committed $10 million a year in incentives. Last May United shut the facility down. I guess “won” is a relative term.

Despite these cautionary tales, incentives can and do work. However, they should be employed with great care. Our towns and the county should consider the use of incentives only as far as they help equalize our more expensive real estate and the higher cost of living in a resort-based economy. Furthermore, the estimated payback of any incentives should be thought of in terms of no more than five to 10 years.

If we start to think seriously about diversifying our economy, it may be best to do so incrementally by attracting certain kinds of small- to medium-sized businesses. These types of businesses are generally less interested in tax breaks and more interested in good housing choice, a skilled labor pool and a high quality of life. Clearly one of the best ways we can promote economic diversity and growth is by investing wisely in initiatives that improve community quality.

Giving away the store to get the store is usually a poor percentage play.

Don Cohen is the executive director of the Vail Valley Economic Development Council.


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