HQ2 Cities: There’s a Better Way to Do Economic Development

The allure is undeniable: A mega-corporation moves to town, bringing with it billions in capital investment and tens of thousands of jobs. Little wonder that the ongoing sweepstakes to win Amazon’s second headquarters has inspired city and state officials to offer record-breaking economic incentive packages in the hopes of attracting the online giant. Chicago has offered $2 billion in tax breaks, including a tax diversion program which would redirect up to 100 percent of potential Amazon employees’ income taxes back to the company. Newark, New Jersey—which has an unemployment rate of 7.9 percent—is offering up an eye-popping $7 billion in state and local tax incentives. Metro-Atlanta offered to form a brand-new city (named Amazon, of course) and proposed legislation that would make Jeff Bezos mayor for life, in addition to the $1 billion in incentives they are pledging to the company.

In return, Amazon promises enormous economic growth to the city that hosts its HQ2. The company’s analysts say HQ2 will bring with it $5 billion in local investment and 50,000 new jobs.

But there is little evidence that such subsidies bring sustainable economic benefit to cities. Research suggests that firms receiving incentives are statistically no more likely to generate new jobs than similar firms that don’t. Perhaps another high-profile megadeal provides some insight into what the winning HQ2 community can expect for their investment: In Wisconsin last year, lawmakers agreed to a $3 billion tax incentive package for technology manufacturer Foxconn—despite the fact that the state’s nonpartisan budget office concluded that the state won’t break even on the deal until at least 2043. That should give policymakers and voters pause.

Public funds generate far better—and more immediate—returns when they are prioritized for smaller, Main Street-scale economic development efforts. The most cost-effective and promising path for bettering the lives of city residents begins at home, via encouraging growth from within the city by building local capacity, leveraging existing assets, and creating quality places that can attract entrepreneurs and investors. That’s the premise behind Main Street America, a national network of organizations and individuals working to revitalize local economies. Since 2013, I’ve been the president and CEO of the National Main Street Center, which runs the Main Street America program.

In the nearly 40 years since Main Street America began, modest investments by cities and states in support of locally driven economic development have driven impressive returns. With relatively small budgets and large teams of volunteers, Main Street America programs help to transform their communities in myriad ways, from public art projects in Portland, Oregon, to community health initiatives in Arkansas to business retention support programs in Emporia, Kansas. Taken together, these kinds of projects contribute to enhancing the overall quality of life in a community, making it a more attractive place for potential investors, and a more inviting place for residents and shoppers. In 2016 alone, the 1,000 communities participating in the Main Street America network collectively invested $745 million in public resources to leverage more than $4 billion in private investment. Put another way, for every public dollar invested, the private sector matched that and added another three dollars.

One recent example of how the program can trigger big payoffs: Between 2015 and 2016, the city of Boston invested $1.8 million in 20 “Main Street” commercial districts throughout the city. The program helped preserve the historic facades of storefronts, provided direct technical assistance to small businesses, and helped support women entrepreneurs launch and grow startups. These efforts generated nearly $7.3 million more city tax revenue than would have been expected without the presence of a sustained neighborhood development program, amounting to a $5.5 million net fiscal gain for the city. And the benefits didn’t just flow to the city’s coffers: nearly 100 new businesses and 500 new jobs were created.

Beyond this program, other cities are also seeing powerful results from a focus on growing jobs from within. In Nashville, Tennessee, the city used federal “Promise Zone” funding to strategically invest in entrepreneurs, makers, and small-scale manufacturers. The program directly supports local business owners in commercial districts by helping them secure space to launch businesses, providing funding to help them grow, and building capacity to ensure they thrive. This kind of localized economic activity creates four times as many stable jobs as large industry does in the city.

Smaller cities have been able to see similar results: Littleton, Colorado, population 42,000, is a pioneer in an economic development concept known as “economic gardening.” The town began this experiment in the late 1980s, when missile manufacturer Martin Marietta (now Lockheed Martin) dramatically cut its footprint in town, resulting in the loss of 7,500 jobs and over 1 million square feet of vacant commercial real estate. Instead of attempting to lure in new corporations with incentives or tax rebates, the city focused on helping existing businesses grow by identifying new markets, mapping geographic areas for qualified sales leads, and raising visibility through search engine optimization and sophisticated digital marketing. In the three decades since, Littleton has gained 15,000 jobs and sales tax revenue more than tripled from $6 million to $21 million—all without recruiting, incentives, or tax rebates.

So, here’s a thought for the 19 mayors who are fated to “lose” out on HQ2, and the approximately 218 mayors who already have: Take just 10 percent of what you were going to hand over to Amazon—a company that may be on track to be a $1 trillion business—and invest it in local place-based economic development. Focus on creating neighborhoods that are attractive to innovators and entrepreneurs—neighborhoods that have a distinct sense of place, dense mixed-income housing, cultural offerings, and accessible transit. Systematically identify and cultivate existing businesses that are ready to grow by connecting them to technical and financial resources that help them scale. Finally, actively seek out the would-be entrepreneurs in your midst, and help smooth their path by offering training, low interest loans, and small grants.

Then sit back and watch the dividends accumulate. And maybe take a small bit of pleasure in seeing the housing affordability, traffic, and budget crisis you avoided when your city failed to “win” HQ2. You may find that your city wasn’t the loser after all.

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