☆ How can a city attract new businesses? Mark Moses suggests the “ombudsman” approach (3/4)
Rather than chase short-term ribbon cuttings with unsustainable and disruptive tax breaks, cities should help all kinds of entrepreneurs navigate the complex approval process. And while they’re at it, simplify the process altogether. So says Mark Moses, author of The Municipal Financial Crisis, in an Opp Now exclusive Q&A.
Opportunity Now: We're looking at an old page on the City of San Jose’s website listing different tax incentives for businesses. They featured a Business Cooperation Program meant to offer a 30% rebate for certain construction-related sales taxes. What’s wrong with that?
Mark Moses: Well, when I was in Fremont in the early 2000s, when Kaiser and Toyota moved in, we didn’t need to offer that rebate.
ON: You were Assistant Finance Director at the time?
MM: Yes, and then later Financial Services Manager.
ON: Can you explain how that construction sales tax rebate works?
MM: So, if you have a $20 million construction project, you’re going to be buying steel and taxable materials. If you do nothing, the portion of the sales tax that comes back from the state to the city is miniscule.
But the state has a program that lets you allocate that money locally, so the city gets a much larger share of the sales tax.
ON: So if a business just does a little more paperwork, then a larger portion of sales tax they were paying anyway comes back to the city.
MM: Right, with a little more paperwork, they can allocate the full local tax portion to the city. It makes a huge difference to the city.
ON: So, of that portion that comes back to the city, San Jose was offering to give 30% of that back to the business. That’s a win-win, right?
MM: Well, we didn’t have to offer Kaiser and Toyota a 30% rebate. We didn’t bribe them to do the extra paperwork. We just asked them.
ON: And they complied with your request? What was in it for them?
MM: From a business’s point of view, it’s no skin off their nose to have money allocated locally, right into the community they’re building. It takes pressure off city revenues, and they’re not going to be as anxious about the city later on doing something like increasing the business license tax.
ON: And we’re talking about taxes the business would be paying anyway, but this lets them direct it to the city. It seems like a way for an incoming business to build goodwill and a good working relationship with the city.
MM: Yes, businesses are excited to come to town; and when the city approaches them, it shows them the city is involved and cares about their success.
ON: So, if the city’s not building incentive programs, what is the role of the economic development departments?
MM: You really need an ombudsman. That’s the best thing an economic development department can do. When a business is relocating, it doesn’t want to run into excessive bureaucracy, which favors big businesses. Who advocates for the small- and medium-sized businesses that have to deal with the same regulations?
The problem with incentive programs is that, as long as one business benefits, the city can declare victory, saying, "We brought this new company into town by the end of the fiscal year."
ON: San Jose’s updated economic development page actually has a "how we help" section.
MM: Yes, I saw that. This is much more helpful and on point. It’s positively designed to help businesses navigate the various approval processes. This suggests the ombudsman approach and sheds the emphasis on economic incentives.
The next level of improvement would be to sufficiently simplify the approval processes so small businesses don't require extensive handholding.
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