COVID-19 Economic Response and Recovery
Retool Incentives to Support Small Businesses
Retool existing incentive programs to (1) include small businesses and (2) support the hiring of local residents, particularly those with barriers to employment.
Small businesses are being disproportionately impacted by this crisis and often do not qualify for incentive programs, due to minimum requirements on investment and jobs created. By opening incentive programs to smaller firms, cities can support local businesses through the recession and advance other policy goals (e.g. workforce, equity, living wage, etc.).
Business Expansion Incentive Program – Austin, TX
The City of Austin has experienced two decades of rapid growth and expansion, which has led to challenges around equity and inclusion. In 2018, the City adopted new guiding principles, which put “equitable prosperity, opportunity, and affordability” at the center of the City’s economic development policy. The City retooled its incentive programs to align with this policy, prioritizing small and local businesses, hiring residents with barriers to employment, and paying a living wage.
Austin’s Business Expansion Incentive Program offers three types of assistance:
- Local Austin Business: Offers up to 3% wage reimbursement per job/per year maxing out at $1,800, and up to 50% property tax reimbursement. The incentive is available to all registered Austin businesses, which pay Austin’s living wage.
- Targeted Hiring: Provides $3,000 per target job/per year and up to 50% property tax reimbursement for the creation of 1 job in targeted populations or for residents who have barriers to employment, and pay Austin’s living wage.
- Relocating: Offers a 3% wage reimbursement per job/per year maxing out at $1,800, and up to 50% property tax reimbursement for businesses new to the city and creating 75+ jobs over 10 year paying Austin’s living wage.
While still open to larger and relocating employers, typical of most incentive programs, the City’s Local Austin Business and Targeted Hiring programs have eligibility criteria designed to allow smaller, local businesses to qualify for these incentives. Program elements include:
- All incentive projects are evaluated by staff using a cost benefit analysis to determine fiscal impact. Importantly, to ensure smaller local firms can qualify, the City does not require the project to have a net revenue positive impact for the City, but it must be revenue neutral.
- Austin uses a return on investment calculus, which includes a broad definition of community benefits such as development and hiring underrepresented groups; demonstrating diversity, inclusion, and equity practices and policies; neighborhood connection; local partnerships; sustainable business practices; and civic engagement.
- The City provides bonus qualifiers for small businesses, cooperatively owned businesses, businesses, which engage local music and arts community, and businesses that provide on-site day care.
- All three incentives require that qualifying jobs must pay the Austin living wage of $15 per hour.
- All grants are performance based and quality controls include a third-party audit system.
- While most incentive projects must be approved by the City Council, the Economic Development Department is able to negotiate and award incentive deals up to $61,000 per project for a total up to $5 million per year.
Small businesses and MWBEs have benefited from the City’s new individualized focus on smaller incentive deals.
For example, a local minority-owned restaurant, L’Oca d’Oro, agreed to retain 20 individuals over 5 years from the program’s targeted population, and make 10 new hires. In return, the restaurant receives $2,000 annually on a declining basis for each retained employee and $220 per year for each new hire.
Another minority-owned firm, AllPro Hospitality Staffing, committed to creating 10 new jobs under the targeted hiring incentive.
How to Adapt This Approach:
- Review past outcome data to assess the effectiveness of current incentives in advancing inclusive goals
- Engage a diverse set of local business groups, merchant associations, chambers of commerce, and other community stakeholders to determine potential changes to current incentive offerings or identify the need for a new incentive program
- Develop proposed modifications to existing incentive programs, which align with the City’s broader equitable economic development strategy/recovery plan. These modifications could include:
– Opening existing programs to local small businesses
– Targeting incentives to businesses located in LMI neighborhoods
– Incentivizing the hiring of residents with barriers to employment
– Supporting businesses investing in upskilling of existing employees
- Revise eligibility requirements to align with these modifications (e.g., reducing new job creation/ retention minimums, reducing investment requirements, reducing the complexity/legislative requirements for incentive approval, setting a neutral fiscal impact standard, including a broader set of community benefits in return on investment analysis, etc.)
- Conduct analysis to model the potential uptake of the modified incentives and assess potential fiscal impact
- Share proposal with stakeholders and incorporate feedback
- Articulate policy case for the proposal to policy makers and secure approval
- Partner with merchant associations, local/ethnic chambers, and other community groups which are trusted partners in the communities, to drive outreach and promote the modified incentives.
- Track and publish KPIs on a regular basis. Include impact, demographic and neighborhood data on each incentive project. (See KPIs section)
COVID-19 Economic Response and Recovery
Redesign your Business Attraction, Expansion and Retention Incentives
During an economic downturn, you should consider refocusing the financial incentives that were used to recruit new businesses, such as tax breaks, attractive loan financing and grants, to support retention and expansion of existing businesses.
Examples of US Financial Incentives Include:
- Industrial development bonds
- HUD CDBG revolving capital fund
- EDA loans
- Revolving capital fund
- SBA 504 loans
- Restoration tax abatement
- Business retention and modernization tax credits (e.g. payroll, sales/use, investment, clean energy)
- FastStart/on the job/incumbent worker training program
Source: Georgia Institute of Technology, 2010
COVID-19 Economic Response and Recovery
Implement incentives to help low-income and minority communities
For decades, cities have used incentives to attract and retain businesses. Historically, incentives often caused “race-to-the-bottom” dynamics that hurt all cities involved, where cities give significant tax breaks without considering overall economic goals, because they felt the need to compete on cost with other cities. Research shows that this has led to the “prisoner’s dilemma”, where each city offers additional incentives until it may not be in a city’s interest to have the company located there given the tradeoffs.
However, this does not mean that incentives should never be used. When crafted thoughtfully to align with local economic development goals and drive local growth and jobs, incentives can be a useful tool. With many businesses struggling due to COVID – with an expectation that all companies will continue to suffer due to the pandemic – cities need to think about how they will support their local businesses. As the economy starts to recover and businesses are looking to expand again, local communities need to be situated to capture this growth.
Cities should retool existing and/or develop new business incentives to advance equitable economic growth. Incentives should be structured to successfully attract and retain good jobs while requiring employers to develop local talent, particularly for low-income residents and people of color.
Birmingham, Alabama “TIP TAP TOP” Program
Shipt was a start-up founded in Birmingham, AL, in 2014. The online grocery delivery platform grew rapidly and was acquired by Target in 2017. After acquisition, the company projected 881 jobs would be added over the next three years, but the question was where those jobs would be located: would they place those jobs in the Bay Area – where some employees were already based? Would they move jobs and headquarters to Minneapolis where Target is headquartered? Or, would they keep those jobs in Birmingham?
The City of Birmingham realized that to ensure Shipt and Target would keep jobs in their city, it would need to incentivize them to stay. But, the City did not want to just offer incentives that lowered tax collection without furthering economic development goals. Therefore, the City developed an innovative incentive program: “TIP TAP TOP.” All three elements described below are tax abatements against the taxes that SHIPT owes the City in exchange for the investment in three areas:
- Talent Investment Program (TIP): Shipt invests in training for “demand-driven” occupations via occupational tax abatements. The program focuses on recruiting people for positions that are difficult to source locally (e.g., web developers, software engineers) who relocate and move to the area. It could include providing supplemental salary, relocation assistance, etc.
- Talent Acceleration Program (TAP): Shipt supports tuition assistance, learning, and skill development designated for enabling existing low-wage and lower-skilled employees to grow into other positions within the company. This includes enrolling in skill training programs, classes, and other entities.
- Talent Optimization Program (TOP): Shipt supports the hiring of local talent, training, and development (e.g. management training and continuing education) for current employees; and the attraction of national talent. This is the main element of the program and includes targeted funding to hire local university students.
Shipt is responsible for all program expenses and is only able to apply for reimbursement for a portion (up to ~$1.76M). In its draft project agreement (attached), Birmingham explicitly describes which costs are eligible/ not eligible for reimbursement, and Shipt only receives reimbursement after successful implementation (e.g., only can receive reimbursement for TOP if new local talent is hired).
Birmingham implemented the program in 2018 and convinced Shipt to keep jobs — and expand — locally. The City has a robust set of success metrics to evaluate the program (see document in resources section). All the above incentives are only provided based on individuals who have successfully gone through the program.
Several other cities have implemented similar, targeted incentives programs. For example, Austin’s Business Expansion Incentive Program provides support for businesses that are growing and looking to hire local, hiring employees with barriers, or reconsidering moving to Austin. These incentives include some wage reimbursement and are paid out annually at the end of the year. To apply, businesses can submit an incentive inquiry to start the process.
The program offers incentives to three types of businesses:
- Local Austin businesses (e.g., those already based in the area)
- Businesses that are growing locally can get up to 3% wages reimbursement per job / per year (max $1,800) and up to 50% property tax reimbursement
- To be eligible for these incentives, businesses must have registered and been operational in Austin for at least 12 months and have created at least 5 jobs over 5 years paying (at minimum) the Austin living wage.
- Employers hiring targeted populations
- Businesses hiring employees with barriers can receive up to $3,000 per target job / per year and up to 50% property tax reimbursement
- To be eligible for these incentives, businesses must have created 1 job for targeted populations and the pay must be (at minimum) the Austin living wage
- Businesses relocating to Austin.
- Businesses that relocate to Austin can get up to 3% wages reimbursement per job / per year (max $1,800) and up to 50% property tax reimbursement
- To be eligible for these incentives, businesses must have no significant presence in Austin (defined as 5 or fewer Austin employees) and create at least 75 jobs over 10 years paying (at minimum) the Austin living wage.
How to adapt this approach:
- Identify community priorities that should be served by an incentives program (e.g., talent investment, local hiring, business attraction)
- This should be done by looking at the greatest community needs (e.g., if a community has a lack of a certain type of high-in-demand job type or if a university has a particular program that produces many graduates with specific skills).
- Develop new or retool existing incentives program with incentives linked to clear equitable outcomes/metrics (See template in resources section)
- A reasonable tax abatement should be set per job created/ attracted/ saved, depending on local circumstances. Incentives should focus on low-income and communities of color (look to Birmingham and Austin examples, below, for suggested figures for incentives).
- Note: Incentives should be given after companies have demonstrated impact (e.g., provide data to city officials showing # of local hires)
- Reach out to local and prospective businesses to market test incentives. Confirm with companies that the incentives will be useful for them.
- Obtain approval for incentives program from authorizing body (generally city council)
- Develop materials to explain incentives program and how businesses can take advantage of them
- Reach out actively to local businesses to highlight new incentives program
- Engage potential businesses that would consider expansion
- Develop agreements with businesses for incentives program
- Track success of program using clearly established and agreed-upon metrics with individual businesses (See template in resources section)
- Attracts businesses and talent to local community
Leverages employers to invest in low income and people of color and connect them to good jobs.
- Lost tax revenue for the city
- Companies may threaten to leave and/or not commit to the community unless they receive incentives
Implementation time: Slow
Cost: Low. Your city will need FTE to implement the program and monitor progress.