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Incentives versus Subsidies

July 21, 2011 - Ernest Hohmeyer
It seemed to be so much simpler when I was younger. Things seemed to be so much more black and white. It seemed to be easier to tell Republicans versus Democrats back then. You could follow your favorite sports teams and grow up with the players who often played most of their careers for one team. It seemed to be easier to tell what was right and what was wrong. It was clear who the enemy was. I grew up in an Adirondack small business household. Everything we did as a family was for the business, by the business and nothing but the business. Our kitchen was the restaurant’s kitchen and the dining room the same as the customers.

Opportunity Knocks

My father believed that a dollar not earned was worth nothing. He advocated that hard work and self reliance would eventually prevail over just about any obstacle. Life was full of opportunities. The struggle, he would say, was finding one that excited you, following up on the necessary effort to make it work and sticking to your plan. If there was a need then there was an opportunity, and American entrepreneurial ingenuity would solve it. He always reminded me to note what needs change, and what made sense in your business model yesterday may not work tomorrow.

When I entered the world of economic development, you can imagine the philosophical discussions we had. We spent many an evening debating as father and son, pupil and mentor and two people who respected each other but dared not to admit it, about the role of free enterprise versus government sponsored subsidies. I would explain to my father that we do not provide “subsidies” but “incentives.”

Incentives Versus Subsidies

Incentives are defined in the online Merriam-Webster dictionary as “something that has a tendency to incite to determination or action; something that encourages a person to do something or work harder.” Synonyms include “boost,” “spur” and “stimulant” among others. “Subsidies” are described by this same source as: “a grant or gift of money” and—here is what is interesting—“a sum of money formerly granted by the British Parliament to the Crown and raised by special taxation.” Synonyms according to the Merriam-Webster dictionary include: “entitlement” and “grant.”

The Economic Development Game

The world of economic development can be a cutthroat business. Each community professes to be the best for locating businesses. Most have a complex number of incentives ranging from tax breaks, work-force training programs, site location assistance, low interest loans and sometimes grants. Communities inside the Park often did not fare very well in this game of “industrial recruitment.” We could not compete with the larger labor pools of more urban areas, their infrastructure capabilities and well-funded and resourced incentive programs. This was mitigated somewhat by federal and state economic development programs, for which our communities could apply.

Our trump card was our quality of life and people who already had made a commitment to the region. You saw no finer example of this then the recent news of biotech expansion in the area.

I came to realize that the more a company required incentives, in many cases the less viable their overall business plan was.

Not All Companies are Created Equal

I also came to realize that this first rule was different for each industry. For example, there is a reason why biotech and biomedical firms locate themselves around research or medical facilities. Many of their product ideas are born out of research. There is often a tremendous amount of startup investment required, as sometimes there is a long lag between product idea and getting it to the market. There are often many federal and state hurdles to overcome to gain product approvals. Many businesses in this world are truly “seeds” and need time and support to “incubate.”

This is quite different from a traditional retail or service firm, who can quickly transform an idea based on a need into a working business venture. There is also the theory that a strong professional and manufacturing base will attract ancillary service and retail businesses. Thus, the world of incentives and subsidies are often skewed towards manufacturing companies, and not retail, service or investment property developers.

Further complicating the issues of incentives are that many of our major employers are nonprofit or government entities. This often requires special incentives such as payment-in-lieu-of-taxes and other programs.

The world of incentives becomes cloudier still when some of these nonprofit organizations lose their federal and state support and are forced to develop business ventures. Further, even our municipal governments—to justify capital improvement projects—are offering business services.

Time for an Incentive Plan?

So we live in a world that may appear to many as being an unfair playing field of business assistance. Some may not understand how local taxpayer or federal and state grant monies that were used to build community assets can also get into the game of providing business services. The difference between providing incentives and subsidies—and who qualifies for what—is becoming less black and white. It was always a complicated formula based on the number of jobs created, tax based enhancement and destination impact.

It is becoming grayer now that government, nonprofit institutions and organizations are seeking to develop entrepreneurial models in order to continue their existence. They are also now seeking incentives and subsidies.

Is it a good time to develop an overall economic incentive plan that clearly identifies and prioritizes the types of businesses each of our communities believe are needed? Much of this work has been done already with various community plans and CEDS documents. We have a golden opportunity to take these plans and take two important next steps.

1) Develop a targeted marketing effort to attract these types of businesses. For example, a good first step would be a gathering of the area’s biomedical and biotech firms to “pick their brains.”

2) Generate a tiered and clearly understood private and public incentive plan.

Perhaps doing these types of activities would also help to brand our area as being interested in certain types of industry. It may take away the shotgun approach that is often reactionary and too general to be effective. It may also be a marketing ploy to suggest that we may not be interested in welcoming all types of ventures.

My father believed that a business should stand on its own merits. It would survive or fail based on the ability to deliver a valued product or service. If you work hard and the business was successful, you should reap the benefits. If not, you must accept the consequences. Without risk, there was no reward. If a business could not stand on its own, no amount of incentives of subsidies could save it in the long run.

Should our incentives be the same for everyone: for profit, tax exempt and government?

It’s a gray issue that is no longer so black and white.

 
 

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