Finding conducive business environments.

• Author: Cheney, Glenn Alan
• Position: Business Incentives

As the American economy threatens to stagnate and even sink companies and governments, the two are reaching out to each other in hope and desperation. State and local governments need jobs and revenues to sustain civil life; companies need incentives and cooperation to put their enterprises on solid ground in shaky times. The goal for both is still called "economic development," but the solutions each needs are not the development enticements of yore. Things have changed.

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The great recession has apparently spawned the great opportunity. Governments are reinventing their role in economic development, backing off from old-fashioned fiscal incentives as they look for more productive relationships with business. Cash and tax break incentives still ring the corporate chimes, but the cost-effectiveness has become so questionable that governments and taxpayers are wondering whether it's the best incentive.

At the same time, companies are looking for environments more conducive to doing business. They want havens from irrelevant regulation and complicated taxation. They want a workforce skilled in their company's particular tasks. They want governments that create opportunities, not obstacles.

And governments are looking for ways to satisfy those corporate wants without spending too much or giving up desperately needed revenues.

Which Incentives Work?

Mark Robyn, an economist with the Tax Foundation, says it's hard to identify a general trend in incentive efforts. In this recession, he says, "you get some states saying they need these incentives more than ever because there's a huge focus on jobs, so they're ramping up the incentives. Others say that when you look at the cost-benefit analysis, it doesn't add up, it isn't worth it, especially when you're hurting for money. So those states are cutting back on incentives."

The crucial question for governments, then, is which incentives work to attract or retain business? And businesses face the parallel question of which incentives are best for their company. In a given year, corporations make some 1,500 major location or expansion decisions. Some 15,000 economic development organizations vie to win the benefits of those decisions.

In that 10-1 ratio, each company will have sifted through the offers of 10 organizations and chosen one. And nine governments will have wasted a lot of effort.

The relationship between tax levels and budget gaps is unclear and contradictory. Neither high nor low taxes guarantees a balanced budget. Nevada is quick to tout freedom from taxation of corporate income, corporate shares, franchise tax and personal income tax. But it is less proud to lead the nation in anticipated budget gaps. According to the Center for Budget and Policy Priorities, the state leads the nation in the shortfall between revenues and cost of services, a gap of 45.2 percent in fiscal year 2012.

Texas, another tax-slashing state, ranks third. But New Jersey and California--where taxes are considered...