Mixing apples and broccoli: governments and incentive payments for retailers

I am all for Montgomery County not giving an incentive payment to Costco to locate a store at Wheaton Mall (see "Montgomery County Council to block Leggett's $4m Costco deal" from the Examiner), in order to weaken their retail environment and competitiveness compared to DC, but that has nothing to do with the issues at hand as it relates to and within Montgomery County.

From the article:

"Westfield Mall has gazillions of dollars," said Councilman Marc Elrich, D-at large. "The idea we're giving them $4 million more -- no way. They're going to make a freaking fortune on Costco. They need to suck it up and deal with it."

Behind the scenes, Leggett has been lobbying council members opposed to the deal, furious they would even consider backing out of the agreement with Westfield, according to multiple county officials.

Leggett has said Costco would generate more than $1 million annually for the county's tax coffers.

However, council members said they simply could not justify the expense amid substantial cutbacks in transportation, public safety, and parks and libraries.

For many years I was against such payments, because I didn't understand how the industry worked, and because seemingly stores were seeking payments to locate in "already successful areas" while it was almost impossible to attract stores to underserved areas.

The reality is that no submarket is an island. So locations in places like Downtown or Georgetown compete with Montgomery Mall, White Flint, Tysons Corner, Friendship Heights (DC and Maryland) etc.

It doesn't matter if Georgetown is more successful than H Street, Georgia Avenue, Brookland, etc., as it competes with different places.

With regard to Wheaton, it is failing compared to Silver Spring, Bethesda, and Rockville Pike. What should be its strategic positioning going forward? From the standpoint of "place capital," what should they do? Now I wouldn't likely say, recruit Costco, but it is clear that they should be having a broader discussion about the future of Wheaton beyond the Costco question.

In order to remain competitive with other locations within a regional landscape, communities have to do things like provide incentive payments, which the retailer expects because their customer generation practices benefit other stores and the area commercial district.

Note that even if a retailer says this, it isn't always true. Some types of stores don't generate much in the way of substantive business for other retailers. This is the case for stores like Ikea or Walmart, which for various reasons, capture most all of a customer's attention when people go their to shop. With regard to Walmart, their business model aims to capture as much as 100% of a consumer's discretionary budget for retail purchases, which means they aren't a good store in terms of generating business for other stores either.

This could even be an issue with Costco, in fact I expect that it is. However, if you make a calculation that the sales tax revenues and jobs and income taxes and property tax revenues generated by the store will yield a positive rate of return on a $4 million incentive payment, then go ahead and make the payment.

It's called the investment concept.

I used to joke when I worked by Center for Science in the Public Interest that they understood the investment concept in terms of investing in the direct marketing program for their newsletter (you lose money on the subscriptions for the first year, and make money in future years as customers renew, although technically at CSPI, subscribers are "members") but they didn't use the same principle for the rest of the publishing program (which I was nominally responsible for).

There I said my boss' philosophy was "show me you can do something with no resources at all, and then I will give you a very little bit."

Well, the investment concept is what you have to use when you consider tax incentives for development of all types. Some of the projects make sense. Others don't. The issue is to develop the right evaluation systems so that public entities are making the right kinds of decisions overall, so that the public interest is protected, as is the revenue stream of the local government.

Montgomery County Councilmembers like Marc Elrich are pretty much like my old boss and miss the point. There was a reason CSPI's non-newsletter publishing division didn't succeed. We didn't invest in its success.

The thing that scares me a lot is that generally, the suburbs do a better job than DC in competing for business.

Here's something that's happening that is a rare example of a benefit to DC in terms of what it communicates about Montgomery County's business environment.