Want to improve the odds government-backed economic development incentives succeed?

Newswise — A new study from Case Western Reserve University School of Law seeks to help settle a long-standing debate about how to design incentives to spark economic development in distressed places. It finds that “smart” incentives—those selectively awarded, monitored and adaptable—yield greater community impact.

“When it comes to offering incentives to businesses as a tool for community revitalization, policymakers have vacillated between rewarding business activity at-large with minimal oversight and targeting incentives more strategically and selectively,” said Matthew Rossman, a professor of law and director of the Community Development Clinic at the school’s Milton and Charlotte Kramer Law Clinic, who designed the study. “We hope our research makes a meaningful contribution to this debate.”

The research was published this week in the Washburn Law Journal.

Despite political popularity, economic development incentives have shown limited success, prompting a closer examination through on-the-ground insights.

 A team of four students from Rossman’s Urban Development Lab examined over 100 businesses and conducted nearly 30 interviews with business owners, community leaders, development experts and residents from six Cleveland neighborhoods—Hough, Glenville, Central, Fairfax, St. Clair-Superior and Buckeye-Woodhill—that possess the “city’s best mix of both need and opportunity.”

Each student investigated the performance of one of four distinct incentive programs in those neighborhoods: Opportunity Zones, New Markets Tax Credits (NMTC), the Neighborhood Transformation Initiative (NTI) and the Paycheck Protection Program (PPP).

“This approach is interesting,” Rossman said, “because instead of studying incentives in the conventional way using statistical data, we went out and talked to business owners and community members. We asked them: ‘What is actually working and why?’”

• Opportunity Zones and New Markets Tax Credits are both federal tax incentives that reward investors for putting capital into businesses in economically distressed areas, but they epitomize the differences in program design at the heart of this study. There is no formal selection or monitoring process for Opportunity Zones investments and no cap on the volume of investments that qualify for the incentives. By contrast, investor intermediaries must compete for a limited number of NMTCs by demonstrating potential community benefit, and the program is subject to ongoing Congressional reporting requirements and review.  

• The Neighborhood Transformation Initiative is a hyper-local approach to revitalizing a limited number of carefully selected neighborhoods through highly targeted investments in infrastructure, housing and business development.

• The PPP was a federal forgivable loan program established during the COVID-19 pandemic that was broadly and directly available to small businesses to help keep their workforce employed. 

Among other findings, researchers found that NMTCs fared best among interviewees as an incentive they thought yields significant community benefits. Successfully competing for NMTCs requires a strong showing of financial plans and a detailed outline of community benefits, Rossman said. “You have to be able to show how each dollar will be used and to what effect,” he added.

Several interviewees with development experience also noted how continuous scrutiny has caused NMTC program design to evolve over time to better address the program’s underlying goals. Interviewees described the design of the NTI, which also has “smart” features, in similar terms.   

By comparison, Opportunity Zones incentives, while considerably easier to access and more plentifully available, lack meaningful oversight. The interviewees observed the incentives often go toward projects like high-end residential development in the most prosperous areas of the qualifying census tracts. Interviewees contended Opportunity Zones incentives typically serve as a sweetener rather than the ‘but for’ cause of development in the neighborhoods studied. 

The interviewees also criticized programs that have too much red tape. “The ideal program hits the sweet spot,” Rossman said, “where red tape doesn’t hinder progress and oversight directs incentives toward projects that have the greatest potential to create jobs and wealth in targeted communities. That’s how you really thread the needle, and after having studied tax deductions and economic development over the last decade, that’s the trickiest part.” 

As Rust Belt cities like Cleveland strive to bridge the gap between economic development initiatives and tangible outcomes, Rossman said he hopes the insights gleaned from the research will influence policymakers to incorporate smart design in creating new incentives. He also hopes it inspires others to use the Urban Development Lab’s methodology to undertake larger studies of this type.

David Ebersole, former economic development director at the City of Cleveland and now adjunct professor at the law school, co-teaches the Urban Development Lab and assisted with the study.

For more information, contact Colin McEwen at [email protected].