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When and When Not to Use Incentives to Attract Business or to Retain Existing Business These guidelines for recognizing an effective incentive from an undesirable one are designed to assist public finance officers as they walk the fine line between offering a reasonable incentive to a new or relocating business and facing public outcry or even litigation. By Kurt Hahn ncreasingly, municipal governments 4) Loan of public funds to business for mance-based deferrals designed to are being asked to join states and public purposes. Too often ignored is provide the developer time to build up utilities to provide incentives to attract the provision of loans to finance a the business are legal. business or to retain existing business. development's required infrastructure 8) Provision of services at public expense The incentive may take a variety of or fees. This technique, when not (e.g., architectural planning or expedit- forms, bur among the most common adversely affecting the municipality's ing). A new incentive that frequently is forms of incentive are the following. cash flow, can frequently be realized also a win-win for developer and the Expedited or preferential process- with an interest rate exceeding both city is to provide the developer, at the ing. Commonly known as fast-track investment earnings and bond financ- city's expense, an outside expeditor processing, this technique typically ing. This can provide a win-win situa- who knows the city's processes as well involves prioritizing a desired job tion for the developer and municipality. as the developer's needs. and/or revenue-producing project's 5) Grant of public funds to business for 9) Special utility rates. In an atmosphere review ahead of others, as well as public purposes. Many redevelopment of increasing utility deregulation, new coordinating regulatory approvals agencies or municipalities will provide businesses will seek or be offered between departments or agencies so grants for required infrastructure when special rates based on incremental as to speed the processing. a project achieves a positive utility added cost to the utility or through 2) Loan of public assets such as land, outcome or positive municipal revenue discounting the rates for an initial two- building or equipment to business impact. or three-year period. for private purposes. Sometimes an 6) Lease or sale of public land at below- industrial development authority, market rates. A typical redevelopment redevelopment agency, or even a strategy is to acquire and/or assemble municipal electric utility will pro- land using tax increment financing and Legal Constraints vide bridge financing to attract a then sell or lease it at a price that will The Internal Revenue Code regulates job- or revenue-producing project. allow the desired development to be the use of tax-exempt bond proceeds for More common, however, is the successful. private purposes, while federal statutes provision of conduit private activity 7) Legally permissible waiver or deferral govern the use of federal funds or the bond or industrial development of fees. This technique is always reuse of Urban Development Action Grant bond financing to the enterprise. fraught with political problems. Many (UDAG) or Community Development 3) Grant of public funds to business developers planning a project which Block Grant (CDBG) monies. Many states for private purposes. Direct gift of they know the city wants will ask for impose a variety of legal constraints on taxpayer funds is prohibited in most the waiver or deferral of city fees. incentives, the most typical of which are states; however, provision of tax Some cities have adopted policies to "gift of public funds" statutes which rebates and advance payment of provide partial or whole city-fee preclude fee waivers or cash gifts to a some leases for parking facilities or waivers or deferral, if a development private business under a variety of circum- grants for historic preservation or meets specific criteria, and then substi- stances. Additionally, many states in their aesthetic improvements, such as tute redevelopment agency or utility redevelopment laws limit public acquisi- building facades or landscaping, money in the city's treasury to offset tion of real estate and subsequent price often are permitted. the waiver. In many states, perfor- write-downs in resale. Many state devel- • JUNE 1996•GOVERNMENT FINANCE REVIEW 31