Measuring State Incentives - Economic and Fiscal Benefits: A Study of the State of Delaware's Strategic Fund Performance-Based Investments

Decisions to invest in individual businesses may prove to be very beneficial to the local economy, and with a focus on job creation, can often be justified by looking at the projected economic impact or income tax gain. But despite practitioners' reports of positive economic impact, some researchers argue that often the benefits derived from incentive investments are only moderate when compared to costs and that there is little empirical substantiation that firm-specific economic development incentive policies are successful. To address the gap that some scholars argue exists in practitioners' evaluations of incentive programs and make recommendations for practice, this researcher applied the economic impact analysis most frequently utilized by practitioners; as well as, compared the benefits derived from incentive investments to costs. Investments made to 47 firms relocating to or expanding in Delaware during the period of 2001 through 2011 were evaluated. The grants were summarized by industry to understand the economic and fiscal impacts of the cash incentives as they relate to Delaware's growing and declining sectors. The analysis evaluated the various benefits of the grant incentive program to include the financial impact in terms of the return on investment to the state, and the economic impacts in terms of the total job effect, the estimated annual gross tax revenue and the total-value impact to the State's economy. Of the eight sectors studied, all provide strong economic benefits. When applying the financial impact model, four sectors result in a positive first year ROI, and four resulted in a negative first year ROI. All sectors achieved a positive ROI after two years of revenues. Globally the 47 projects in the study yielded a positive first year fiscal benefit. Although practitioners must take into account multiple variables when determining the value of an inducement, the results uncovered areas in which fiscal impact evaluations could enhance the outcome of the incentive commitment.