How to Make Tax Incentives More Effective for Cities

For many years, Philadelphia has awarded businesses hundreds of millions of dollars in tax incentives to encourage them to create jobs, move into distressed neighborhoods, and otherwise enhance the local economy. But the city never had a formal system for regularly evaluating and adjusting the programs.

Until now.

In September, under a new legal mandate, Philadelphia published the first of several comprehensive evaluations—a 142-page report produced by an outside consultant covering seven of its programs. Mayor Jim Kenney and City Council are now discussing changes recommended in the analysis, including converting some tax breaks into grants and consolidating several programs.

“We learned we’re not losing any money, and that’s a good thing,” said Sylvie Gallier Howard, the city’s first deputy commerce director. But “we also learned there are opportunities to improve on the programs.”

Gallier Howard spoke at an Oct. 18 convening in Philadelphia organized by The Pew Charitable Trusts on the use of local tax incentives to spur economic development. In addition to Gallier Howard, the panel included officials from Atlanta, Chicago, and Austin, Texas—three of the cities mentioned in the report—as well as a nationally recognized expert on incentives. Jeff Chapman, who directs Pew’s state fiscal health work, served as moderator.

Before an audience of nearly 100 local officials and private sector stakeholders, the speakers exchanged insights and experiences about how cities evaluate and improve their incentives. They discussed the need to modify programs as economic conditions change; work to ensure that more entrepreneurs from underserved communities take advantage of incentives; and capture more data to understand the impact of incentives, make improvements, and increase transparency.

Updating incentives

For the last two decades, Philadelphia has sought to mitigate the impact of its high business taxes and remain competitive with other regions by creating various tax credit and exemption programs--21 at last count, including some mandated by state lawmakers. An analysis by Pew in 2016 found that the incentives had resulted in an average of $216 million annually in forgone local taxes in recent years. Despite offering the incentives, the city had not created a formal way of evaluating them. In 2017, City Council enacted a law mandating independent evaluations every three years. The 2019 report was the first.

Now Philadelphia “is one of only a handful of cities with a plan to periodically analyze its tax incentives and demonstrate its interest in making evidence-based improvements,” said Alison Wakefield, associate manager of Pew’s tax incentives research unit.

The report found that the city’s overall strategy needed an update. Panelists said that cities must reassess their programs regularly and be prepared to make changes.

In Austin, “no program is allowed to exist for more than five years without City Council re-approval,” said David Colligan, acting assistant director of Austin’s economic development department.  

Ellen Harpel, a Virginia-based consultant who helps cities and states refine their incentive programs, said consolidating incentive programs improves data collection for evaluations and can make them easier to administer. “If you have the data, you can know how to improve the programs, whether to continue or scrap the program,” she said.

Prompted by the report, Philadelphia’s Department of Commerce has begun discussions with City Council on consolidating some tax credits into grants in a new Quality Jobs Growth Program. The department proposes aiming the program at small and midsize businesses that create more jobs for Philadelphians, pay higher wages, and provide health care, among other criteria, according to Gallier Howard. Department leaders also said they want to rename their Forgivable Loan Program, used for closing deals, as the Quality Jobs High Impact Program, with additional “inclusive growth metrics in the scoring process.” Officials are working out details and contemplating other changes as well.

Equity and inclusion

The panelists all said that promoting greater equity for minority and women entrepreneurs must be a top priority in implementing incentives, especially during an economic boom that has benefited some groups more than others. But that’s a daunting task: One reason these entrepreneurs often get few incentives is that few minority businesses apply for them.

“We can formulate and market the incentive program, but sometimes that is not enough to get people to apply. Therefore, it is key to understand why they are not applying,” said Eloisa Klementich, president and CEO of Invest Atlanta, the city’s economic development agency. Invest Atlanta gathered comments and created a technical assistance program to help businesses become “capital- and grant-ready,” she said, which resulted in more applications from minority-owned and disadvantaged businesses.  

Chicago experienced a related issue with a new program to address inequitable development, said Tim Jeffries, deputy commissioner of the city’s Department of Planning and Development. Under Chicago’s Neighborhood Opportunity Fund, developers of high-rise buildings in the Loop (downtown) can build higher if they pay extra fees. The proceeds are then granted to projects in distressed neighborhoods. But the city has found grantees have more challenges than expected in getting projects off the ground.

Colligan, of Austin, said the Texas capital is trying to meet its equity goals by aggressively partnering with other agencies, such as the regional workforce development board, that are better connected to targeted communities.

Transparency and accountability

Evaluating incentives and monitoring them both require data from the businesses receiving the incentives, which can be difficult to obtain.

“A lot of programs were created a long time ago with an eye toward compliance … rather than understanding the outcomes,” Harpel said. “It’s a challenge to find ways to collect the data to report on these outcomes.”

Colligan said cities should have industry “at the table” when establishing data collection and evaluation plans. He recalled once phoning a major business with a new data request and “setting off fire alarms all over the building.”

In Philadelphia, Gallier Howard said, obtaining and releasing data is harder with tax incentives than with grants because taxes paid by individual businesses have strict confidentiality protections. “We would like to be more transparent about our deals, and we hope that [switching to] grants will allow us to do that,” she said.

Building economic strategies

In the end, the role that incentives play in a city’s economic development strategy depends on local economic conditions. In Chicago, for example, a number of major national corporations have relocated to the Loop without incentives, Jeffries said. And Austin maintains an incentive program even though its population has grown 20 percent this decade and the unemployment rate for Travis County, in which the city is located, is under 3 percent.

Gallier Howard said Philadelphia’s strategy is to attract and retain businesses big and small; incentives are important tools in those efforts. “Even cities that are much more competitive than Philadelphia still offer incentives,“ she said. “As long as other cities and regions are doing it, Philadelphia needs to compete.”

Larry Eichel is the project director and Thomas Ginsberg is an officer with Pew’s Philadelphia research initiative.