Return to story

How effective are 'incentives'?

January 1, 2012 12:10 am

AS LOCAL govern- ments seek to build their tax bases and increase sources of revenue, incentive performance agreements are more aggressively used as a business-development tool. Agreements that return a portion of government revenues to a new or expanding business are used by the city of Fredericksburg in its economic development.

The Fredericksburg Economic Development Authority works closely with the city's business-development staff and is responsible for making the annual performance grants to the businesses approved for incentives by City Council. The EDA acts as agent for the city in reimbursing the applicable percentage of sales, meals, or lodging taxes to the approved businesses over a five- to 10-year term based on performance.

Performance measures are in the form of stated levels of capital investment, job creation, and business activity. Incentives help the EDA achieve its mission as a catalyst for responsible economic growth in the city and further the objectives of the JumpStart! Fredericksburg program.

Separate from its participation with the city on incentives, the EDA has over the past 10 years made more than 90 JumpStart! grants totaling over $1 million to a wide variety of businesses, arts organizations, special events organizers, not-for-profit groups, and the city for projects and activities that have expanded the city's economy and improved the quality of life for its residents.

The money to make these JumpStart! grants comes not from the city, but from annual fees paid to the EDA by borrowers such as Mary Washington Healthcare and the University of Mary Washington Foundation on low interest, mostly tax-exempt bonds issued through the EDA for their building and equipment projects.

Incentive programs are much more prevalent today than they were five years ago. The city's programs are responding to businesses that are looking for every advantage in making a business location decision.

Currently, the city has 14 active agreements in place with a mix of retail, hotel, restaurant, and technology businesses. These agreements represent to the city more than 730 jobs, $42.4 million in capital investment, and approximately $17.2 million in net retail, meals, lodgings, and business and professional-licensing taxes over the term of the agreements.

These impressive numbers, bolstered by grocery retailer Wegmans, will help reduce the tax burden on existing businesses and city residents, employ residents locally, and create business-to-business opportunities.

Wegmans was considered a "transformative" incentive performance agreement for the city when it was negotiated in 2009. That agreement, along with the unexercised 2007 Kalahari resort pact, are the largest negotiated agreements held by the city. Wegmans is out-performing its anticipated measures, and Kalahari holds potential for extraordinary direct and indirect benefit.

Both agreements came before the major economic decline that we are experiencing today. The decline has changed the landscape for business-development strategies, and we're in a different world. Tightened credit, unemployment, and a harsh business climate have created an environment that requires another approach.

The city has positioned itself to recruit businesses or encourage the expansion of existing businesses through tourism and technology zones. The zones target specific business types that will generate tax revenues and jobs. Criteria have been developed to objectively address priorities for new businesses. Incentive awards are calculated based on potential return. This method helps to maintain equity in the incentive process rather than the city negotiation with each new or expanding business.

Most important, the programs return a portion of tax revenues to the business once performance specified in the agreement has been verified. No city money is paid before investment has been made, jobs created, and taxes paid to the city.

The city's incentives help our business-development staff distinguish the city as a potential business location. It helps us compensate for real or perceived advantages in other localities. Our partners in the private sector--commercial real-estate brokers, developers, and property owners--are aware of and use incentives as a tool in filling vacant space.

The EDA looks forward to the tourism and technology incentives attracting new businesses, encouraging business expansion, and expediting projects like Capital Ale House and Bavarian Chef in downtown, the planned hotel and defense contractor CBAI & Associates in Eagle Village and in Central Park, AAA Mid-Atlantic's new facility, and communication technology company QRC Inc.--all approved for incentives to expand our tax base.