Researchers: Transparency a key step for incentives

The use of economic development incentives by state and local governments is a common practice intended to attract private investment, create jobs, and stimulate economic growth.

As academic researchers, our work at the Hoover Institution focuses on studying these incentives, measuring how much local economies benefit after incentives are granted, and evaluating ways to increase the returns to local communities. These questions remain largely unanswered across the nation.

For business incentives to be effective, companies must meet their commitments of capital investment, job creation, and wage requirements, and the benefits of local investment and job creation must outweigh the costs to taxpayers.

We believe that transparency is crucial for evaluating the effectiveness of these programs and ensuring an effective use of public funds. Thus, we strongly support Alabama’s push for transparency of economic development incentives.

In Alabama, the state Legislature is currently evaluating four bills related to economic development: the Enhancing Alabama’s Economic Progress Act, the Site Evaluation and Economic Development Strategy Act, the Innovation and Small Business Act, and the Transparency in Incentives Act.

The first three bills aim to increase the total amount of incentives, grants, and credits for economic development within the state. The fourth bill, however, is unique in that it requires public transparency about the state incentives awarded to companies under the Alabama Jobs Act, which is expanded as part of the Enhancing Alabama’s Economic Progress Act. These incentives are estimated to cost almost half a billion of taxpayer dollars.

We strongly support the Transparency in Incentives Act and view it as an important step in allowing taxpayers to understand where their money is going. This act will require the Department of Commerce to publicly disclose information about each company that receives incentives under the Enhancing Alabama’s Economic Progress Act (an expanded version of the Alabama Jobs Act). This includes the name of the company, the county of the qualifying project, the estimated capital investment and number of new jobs, an estimated average hourly wage, the estimated value of the jobs credit and the investment credit, the projected 10-year and 20-year return on incentives, and any cash incentive that
was committed.

Furthermore, the act establishes a permanent Joint Legislative Advisory Committee on
Economic Incentives. The committee shall monitor and evaluate the management process and standards used by the Department of Commerce in the development of project agreements and in the awarding of economic development incentives.

This committee can request comprehensive transparency for all state incentives, not just those granted under the Alabama Jobs Act. This level of transparency ensures that officials will not change their pattern of awarding incentives to favor non-disclosed incentives in the future, as has happened in other states that previously passed selective transparency laws that we have studied.

Transparency is not only important for public monitoring, but it also fosters open communication and builds trust between government and citizens. Additionally, it leads to higher-quality analysis, which in turn improves the allocation and effectiveness of the state’s resources.

Several surrounding states, including North Carolina, Florida, Kentucky, Louisiana, Tennessee, and Virginia have already implemented public disclosure portals for economic development incentives, placing Alabama on par with several surrounding states.

We applaud Alabama for taking this important step towards transparency. This is excellent progress in improving taxpayer awareness of the incentives awarded to companies. Going  forward, we recommend the Alabama Legislature consider two additional changes to the public disclosure requirement to further ensure that the transparency laws facilitate timely monitoring.

We recommend timely disclosure, with information on promised incentives posted no later than the end of each calendar year.

In the spirit of monitoring, we commend the Legislature on seeking a third-party evaluation to assess the impacts of state economic development incentives. In the future, we urge the legislature to also consider enacting public disclosure of detailed, company-specific performance data on the actual amount of incentives claimed, total capital invested, the number of jobs created, and the total aggregate wages of new employees paid by the company recipients on an annual basis.

This would build on the positive steps outlined in this current legislation, which currently entails public dissemination of aggregate performance data. Our research shows that these changes would further improve the state’s transparency effort.

In conclusion, the Transparency in Incentives Act is a monumental step forward for Alabama.

Furthermore, we encourage the legislature to consider future opportunities to build on these transparency initiatives, as additional changes suggested above – requiring timely disclosure and company-specific performance data – would truly facilitate public monitoring and ensure that companies deliver on their promises.

Doing so will provide the citizens of Alabama access to detailed information about the use of taxpayer funds, and it will bring the state on par with its neighbors.

More importantly, it will enable lawmakers to make even more informed decisions about how to allocate public resources effectively and ensure that economic development incentives are truly delivering the intended benefits to the people of Alabama.

Rebecca Lester is an associate professor at the Stanford Graduate School of Business and a Research Fellow at the Hoover Institution. Natalie Millar is an Alabama native, a Research Fellow at the Hoover Institution, a Research Fellow at the Alabama Commission on Higher Education, and a graduate from the Economics PhD program at the University of Alabama.