The nuanced new world of economic development incentives.

• Author: McFarland, Christiana K.
• Position: Commentary - Reprint

Beyond the black-and-white debates of the past, local governments are taking strengths, weaknesses, and social equity into account.

With high-profile local-government economic development deals making headlines and the availability of new transparency data on public giveaways, the tax-incentive debate is in the spotlight in a serious way The arguments are familiar ones: On one side are those who label incentives as corporate welfare in which cities indiscriminately and unnecessarily fork over public dollars to lure potential jobs. On the other side are businesses claiming to need incentives to make deals pencil out and cities convinced that they must meet business demands to secure future growth.

But is the use of incentives really this black and white? Like most things, the truth lies somewhere in the middle. What is lacking, though, is an updated and grounded understanding that goes beyond buzzwords and mudslinging. Digging into local nuances reveals a more complex approach for how, when, and why some cities use incentives that others can learn from.

Take Washington, D.C.'s LivingSocial deal, for example. In 2012, the daily-deals company was offered $32.5 million in tax breaks to jumpstart a technology ecosystem in the District. But the high hopes for LivingSocial, and its job-creation prospects, were dashed as the company lost ground to its competitor Groupon.

The District took a lot of flack for making the deal, but in the end, LivingSocial did not collect incentives. This is because the agreement included community safeguards, including creating jobs before receiving incentives. And although the company failed to deliver jobs, it did help spur a local startup culture in a town best known for politics.

The LivingSocial story sheds light on how many cities, not just D.C., are advancing the practice of economic development. Done right, cities disavow smokestack chasing, start with strategy, commit to data, protect taxpayers, and bring meaningful change to the community.

Across the Potomac River in Arlington County, Virginia, Economic Development Director Victor Hoskins (formerly D.C.'s deputy mayor for economic development) views the debate about incentives as too narrow. "Economic development starts with a strategy that determines how resources are allocated to yield a return for the public good," Hoskins says. "Sometimes this includes incentives, sometimes not."

Arlington boasts a well-educated workforce, a low unemployment rate, a high...