SV cities might break their own budgets to lure in business. Does it even work?
“Economic development” departments in SV cities and across California spend tens of billions for private capital. So says Mark Moses, who argues in CPC that incentives rarely influence a firm’s decision to move in. When budgets are blown out for pyrrhic ribbon cuttings, infrastructure crumbles. Cities then patch new budget holes with more taxes.
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, and perpetuate the very obstacles they purport to overcome.
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.
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).
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.
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