The Heart of Equitable, Sustainable, and Organic Economic Development: Tax Credits and Local Banks

By: Daniel Ohiri

Politicians often tout in their speeches and platforms the needs for economic development. They are fixated on bringing jobs to their constituents no matter the cost. However, bumper sticker campaign slogans and vague statements about economic development are not guided, concrete policy proposals that are necessary for change. More often than not, state and local politicians are turning to corporate welfare as a tool to achieve economic development. The most recent example of this scheme in action manifested when Amazon decided to split its new headquarters (dubbed “HQ2”) between Crystal City, Virginia, and Queens, New York. Governor Andrew Cuomo (NY) would have given Amazon $1.5 billion in tax breaks and subsidies if Amazon hadn't decided to pull its plan for their New York location. While, Governor Ralph Northam (VA) will be giving Amazon $573 million; moreover, the Virginian county where HQ2 will be located gave Amazon a $25 million tax grant for 15 years on top of the state’s deal.

Yes, the Amazon HQ2 deal will bring 50,000 jobs shared between the two locations. But there is a better way to grow the local economy and create jobs than shelling out billions to massive corporations. The heart of sustainable and organic growth rests with local and state leaders making investments in their own communities, especially with the middle class. There are two simple policies that can be taken to push states and cities down the path towards economic success.

The first of which is tax credits. People often confuse tax credits and tax deductions but there is a clear difference. A tax credit subtracts the amount of tax you owe, a tax deduction subtracts from your taxable income before you know how much you owe. This is a huge difference that can either breed economy success or promote economic inequality. Tax deductions tend to benefit the wealthy because they have larger incomes to subtract from before-tax. Tax credits, on the other hand, are far more equitable because it provides equal tax relief regardless of income. States and localities should look for desirable activities they want local business to engage in and provide them tax credits as incentives. This can take the form of providing tax credits for hiring veterans or providing tax credits for millennial entrepreneurs to start a business. Tax credits are an effective incentive for small and local businesses organically, sustainably create jobs.

The second policy promotes states and localities investing in credit unions or locally-operated banks. Major cities have used the financial services of corporate banks to manage everything from city employee payrolls to individual transactions for tax collection.  Over the past three years, states and cities have pulled their cash flows from Wells Fargo over the bank’s involvement in the Dakota Access Pipeline Project or in regard to the bank’s fraud scandal. State and local governments should pull their contracts with corporate banks and instead use the services of credit unions and small locally-operated banks. In doing so, local governments would be directly investing money into their communities creating jobs and promoting the local flow of capital investments. Besides keeping the flow of money on Main Street; governments would also keep their decision-making powers within the local community instead of being tied down by Wall Street. [To read more on benefits of local banking check out: http://rooseveltinstitute.org/wp-content/uploads/2016/04/Municipal-Banking-An-Overview.pdf]

Corporate welfare is not sustainable. Buying into the corporate lens of economic development is buying into greed and the hollowing out of America’s middle class. The government has the responsibility to promote economic growth and development. Governments should create and maintains an equitable economic climate and not be held hostage by big corporations. There are many different avenues and policies that encompass a progressive economic vision. However, at the heart of equitable, sustainable, and organic economic development rests with using financial systems in a socially just and responsible manner. The two easiest ways to encourage productivity growth are using tax credits over tax deductions; and, investing in communities over Wall Street.