The Economic Development Paradigm – City-Created Problems and Taxpayer-Funded Fixes

Economic development departments are often celebrated as promoters of prosperity and local employment. Each year, local governments spend tens of billions of dollars on economic development incentives—tax abatements, fee waivers, and direct subsidies—intended to lure private investment. Cities across the nation tout their ability to entice marquee employers, generate buzz with ribbon-cuttings, and implement incentive programs designed to attract private capital. Even small-city councils establish these departments to signal support for economic growth and to boost city revenues.

Yet beneath the surface of city branding, press releases, and fiscal sustainability strategies lies a more troubling reality: economic development departments, far from facilitating genuine development and demonstrating the appropriateness of their spending, entrench inefficiency, distort markets,1 and perpetuate the very obstacles they purport to overcome.

Incentives, Barriers, and the Illusion of Progress

Development incentives—tax rebates, fee waivers, and similar carrots—are meant to attract business investment. However, these incentives negate the tax and fee structures that cities themselves have painstakingly devised, often at great expense and through a protracted political process. For example, cities pay development and impact fee consultants tens of thousands of dollars to analyze and implement fee structures—purportedly based on the true cost of municipal services.2

Yet these very fees are then slashed or waived to lure preferred employers. The result is not a win-win, but a double loss for taxpayers. Carefully constructed revenue systems become arbitrary, and the cost of public services is obscured (taxpayer loss #1). A vicious cycle emerges: Cities rely on fees and taxes to fund infrastructure and services, only to compromise such revenue structures through selective abatements—thus necessitating higher fees and taxes (taxpayer loss #2).3

What’s often overlooked are the full effects of incentive-driven development. When cities allocate limited resources to court or subsidize select firms, they divert funds from core functions—such as road maintenance and public safety. This misallocation not only undermines neutrality but also erodes the foundational infrastructure that supports long-term economic vitality.4 Between 2017 and 2022, local governments reported a cumulative $93 billion in foregone revenue due to tax abatements. Over that period, waived revenue grew by 28% overall—and by 42% for school districts, which rely heavily on property taxes.5 According to a 2024 analysis by the Harvard Kennedy School, cities spend at least $30 billion annually on tax incentives—even though such incentives influence firm location decisions only 2% to 25% of the time.6

Cities themselves create economic barriers—through high fees, byzantine approval processes, and regulations—that make it arduous and expensive to start or expand a business. When such obstacles prove prohibitive, the economic development department creates subsidy programs and fast-track approval processes, selectively distributing relief to the fortunate few, and then claims credit for solving a problem that the city created.7

A similar dynamic plays out in housing policy. The city’s building and zoning regulations discourage development, leading to a shortage of housing. Rather than address the cause,8 cities establish housing departments that promote subsidized housing. Taxpayers pay for a lucky few (often, the winners of housing lotteries), yet housing shortages persist because the city has done nothing to address its contributions to the problem.9

The Gatekeepers of Privilege

The very title “economic development” suggests a community-minded mission. But in practice, these departments function as gatekeepers of privilege. Decisions about which businesses receive support are often opaque—frequently shaped by personal connections, lobbying efforts, or perceived prestige.10 This lack of transparency undermines public trust and invites political patronage. The selective nature of support means that well-connected firms benefit disproportionately, while smaller or less visible businesses struggle to navigate the system.

Moreover, the incentives themselves are rarely subject to rigorous analysis. Cities may tout job creation numbers or projected tax revenue, but these estimates often rely on optimistic assumptions and lack independent verification. A 2023 report by the Urban Institute found that only 12% of local incentive programs included any form of post-award performance auditing.11

Reclaiming Urban Prosperity

The lifeblood of urban prosperity is not taxpayer subsidy, but private capital and innovation. Local governments are at their best when they focus on the essentials: maintaining public safety and ensuring reliable infrastructure. Cities should be neutral with regard to growth—neither artificially promoting nor stifling it. Certainly, they should never become financially reliant on growth such that they begin to favor growth at any cost. A city’s goal should be to secure a reputation as a welcoming, low-friction destination for business—a place where entrepreneurs can flourish with neither interference nor favoritism.

Over time, the patchwork of incentives and interventions creates a brittle economic landscape—one dependent on continual taxpayer support rather than resilient private enterprise. Cities risk becoming less adaptive to economic shocks, as businesses conditioned to expect subsidies may be unable to weather downturns without them.

The impotence and ineffectiveness of today’s economic development departments are not simply a matter of bureaucratic inertia or misaligned incentives. They are the logical product of a system that confuses activity with achievement, and intervention with improvement. By revisiting government fundamentals—eliminating unnecessary barriers, focusing on core services, and allowing private ingenuity to manifest—cities can reclaim their role as protectors of prosperity, rather than architects of their own dilemmas.

Footnotes

1. As it turns out, the distortion is minor, but only because the programs themselves are ineffective at influencing firm location decisions (see footnote #6)
2. ICF International. Development Impact Fee Study for the City of [Example]. ICF Reports, 2021.
3. Lincoln Institute of Land Policy. The Hidden Cost of Economic Development Incentives. Policy Brief, 2020.
4. Brookings Institution. The Case Against Economic Development Incentives. Brookings Metro, 2019.
5. Good Jobs First, Tax Break Tracker and GASB 77 Aggregated Disclosures, 2017–2022. This dataset aggregates local government disclosures of foregone revenue due to tax abatements, including school district impacts. Available at https://www.goodjobsfirst.org/tax-break-tracker/
6. Harvard Kennedy School. Evaluating the Effectiveness of Local Tax Incentives. Center for International Development, 2024.
7. National League of Cities. Small Business Regulations and the Role of Local Government. NLC Research Brief, 2022.
8.  Although zoning regulations are largely under the control of cities, many cities (for example, those in California) have somewhat limited ability to streamline building codes, due to state mandates; however, they have done little to lobby for the relaxing or elimination of such restrictions.
9.  Urban Land Institute. Zoning and Housing Affordability: Local Barriers and Policy Responses. ULI Technical Report, 2021.
10. Center for Public Integrity. Economic Development Incentives and Political Influence. CPI Investigative Series, 2023.
11. Urban Institute. Performance Auditing in Local Economic Development Programs. Urban Institute Brief, 2023.

Mark Moses is a senior fellow with California Policy Center. He has thirty years of experience in local government administration and finance. His recent book, The Municipal Financial Crisis – A Framework for Understanding and Fixing Government Budgeting was published by Palgrave Macmillan and is available from major online booksellers.  

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