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| Return on Investment: More than a Catchy Phrase | |
| Keys to Fairly Assess Taxpayers' Returns from Public Subsidies of Businesses | |
| Policy Brief (6-pg PDF) January 27, 2010 Backgrounder (2-pg PDF) January 27, 2010 The following are key factors to assessing the return on investment of public economic development programs, tax credits and expenditures. Most importantly, it is critical to establish a credible way to estimate the degree to which any state economic development program, tax credit, or expenditure actually produced the economic activity and the degree to which the activity would have occurred anyway. This must go beyond beneficiaries’ claims about the value of the business subsidy, to hard evidence that a subsidy or set of so-called “incentives” tipped the balance to assure at least a portion of the investment. After this determination, a methodology for calculating public ROIs must address these key issues: | |
| Calculate public investments in terms of public returns | |
| It does not make sense to measure returns in terms of overall economic activity. Public returns involve increased revenue to the state, in taxes and fees, as a result of the increased business activity, andare the way to measure public (tax-dollar) investments for their returns. | |
| Establish a reasonable time frame for making these estimates | |
| Returns in future years should be appropriately discounted. A public investment, like a private one, needs to produce returns over a reasonable period, and future returns should be appropriately discounted. | |
| Compare the return with potential gains from alternative uses of public funds | |
| A proper analysis would account for the lost opportunities that would come from making those investments elsewhere. | |
| Determine net effects of the investment | |
| Estimate the impact of the investment on the direct level of economic activity that is projected to occur, including any potential for displacing existing economic activity. The public interest is in net new economic activity, not displacement of one activity with another, which also can provide unfair advantages to new over existing businesses. Displacement occurs when a subsidy simply enables one business to capture an existing firm’s share of a state market that is not expanding. | |
| Incorporate added public costs as well as benefits from the new activity | |
| Additional public sector costs may need to be factored in, particularly for additional demands on public services and business-related infrastructure needs or workforce expansions when new economic activity draws people (and service users) to Iowa from outside the state. | |
| Do not double-count returns | |
Only count any return once, even if multiple, independent investments were made to produce it. When multiple economic development subsidies are used to produce increased economic activity, the public return from that activity needs to be apportioned among those multiple subsidy programs, so it is not counted multiple times. | |
| Recognize ROI as only one factor to consider as a public purpose or benefit | |
| Some investments can produce economic gain, but at a public cost (environmental degradation or public health and safety). Others can produce public benefits in those areas. Although these do not have a monetary value, they are important considerations in making public investments and need to be recognized in ROI analyses. | |
| Audit for impact and accuracy | |
Estimates and claims are only estimates and claims; there needs to be monitoring for actual impact, use, and achievement of public goals. | |
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