Georgia’s Constitution Restricts Non-Tax Economic Development Incentives, But Does it Matter?

Supporting business retention and recruitment is the primary goal for state and local economic development policy in the United States. Although there are many policies available for this purpose, economic development incentives are an often used and controversial tool. The typical economic development incentive package is comprised of both tax and non-tax incentives. The non-tax portion (cash, grants, low interest financing, land, etc.) often forms the largest share of public resources devoted to the project. Unlike tax incentives, the “rules of the game” for non-tax incentives vary substantially across localities due to differences in state constitutions.

In “Assessing Georgia’s Non-Tax Economic Development Incentives,” Georgia’s non-tax economic development incentives are compared with those in neighboring states with which Georgia often competes for businesses: Alabama, North Carolina, South Carolina, and Tennessee. The findings show that Georgia has more constitutional constraints on non-tax incentives than neighboring states, meaning the types of available economic development incentives programs, as well as the methods for financing these programs, are more constrained than neighboring states. Yet, Georgia consistently outperforms neighbors in business climate rankings.

An often debated provision of the Georgia Constitution prohibits gifts by any public and quasi-public entities. Either directly, or indirectly through another public or quasi-public entity, Georgia’s neighbors may give private companies cash or property as an inducement for location. Georgia programs have to fund economic development aid so that the title remains vested with a public entity. Georgia incentive programs may be used to purchase and improve the site for a new facility, but a public or quasi-public entity must own and then lease it to a private company. Neighboring states may also choose the lease option but they also have the option of making gifts or improvements on private property. This is the route taken by Alabama, when the state financed improvements on the Tuscaloosa County site that was ultimately deeded to Mercedes-Benz in 1996.

The Georgia Constitution contains similar restrictions on loan funds. For example, the OneGeorgia EDGE Fund and Tennessee FastTrack Economic Development Fund provide loans (and grants) to local governments and development authorities to finance the purchase of equipment as an incentive for locating private companies. The local government or development authority recipient must retain ownership of the OneGeorgia financed equipment and lease it to the company. On the other hand, the FastTrack recipient may either give the company money as a reimbursement for its purchase of the equipment or directly donate the equipment to the firm.

Proponents of non-tax economic development incentives argue that limitations like those in Georgia put affected state and local governments at a competitive disadvantage by restricting policy options. This point of view has dominated the economic development policy landscape in the United States over the last 50 years, resulting in a general trend of easing constitutional restrictions. Critics of incentives, on the other hand, suggest incentives do not affect firm location choices and redirect public resources in potentially harmful ways. In this view, constitutional restrictions provide useful bounds on the use of incentives by state and local governments.

Georgia’s business climate is often touted as one of the best in the country, so it isn’t clear that current limitations harm Georgia economic development. That being said, Georgia policymakers cannot match all types of economic development incentives available in neighboring states without state constitutional changes. The question is do they need to?

Carlianne Patrick