The City of Grand Rapids Economic Development department recommends construction development tax incentives on the basis of the subcontractor diversity quotas.
Citing the authority of the city’s Inclusion Plan, the City Commission, under the guidance of its Economic Development program, distributes Tax Increment Financing (TIF) incentives for developers who promise to hire majority minority- and women-owned companies.
The program also offers financial incentives for builders to take rent losses in order to keep housing prices low.
The Inclusion Plan
Part of the city’s calculus in distributing tax incentives is the developer’s commitment to inclusion.
The city measures this through metrics established in its Inclusion Plan, which was published in 2021. It created a new part of the developer tax incentive application process, laying out a policy that encourages developers to discriminate against subcontractors on the basis of race and sex in order to receive the city’s support.
Its purpose, it states, is to use government authority “to increase contracting opportunities in Grand Rapids for Minority-owned Business Enterprises (MBE), Woman-owned Business Enterprises (WBE), and Micro-Local Business Enterprises (MLBE).”
The plan claims that these targeted programs will improve the whole economy. It asserts that “reducing racial and gender gaps that exist in the construction industry” will have the larger effect of “increasing economic prosperity.”
It further aspires to create a new labor supply by increasing “the number, capacity and access of MBE, WBE and MLBE contractors operating in the City of Grand Rapids and Kent County.”
Developers, to even apply for building incentives, must submit their own Inclusion Plan containing a list of “aspirational goals” to the end of achieving inclusion.
The city then monitors the pursuit of these goals before, during, and after the construction is completed. Failure to pursue the aspirational goals in “good faith” can lead to the revocation of the tax incentives.
The Benefits
The city offers tax incentives through different programs, the most prominent of which is called Tax Increment Financing (TIF), which is managed by the city’s Brownfield Redevelopment Authority.
The program aspires to stimulate the redevelopment of obsolete urban sites, helping pay for cleanup, demolition, and infrastructure while also subsidizing housing programs.
It targets the redevelopment of existing properties, enticing developers to undertake these projects by reimbursing eligible costs through TIFs, which freeze a property’s tax base at its pre-development level.
The increment—extra property tax revenue from the increased value after redevelopment—is captured and redirected (often for 15 to 30 years) back to the developer to fund eligible project costs, with the expectation for future growth to pay for today’s improvements.
Along with supporting minority subcontractors, the Brownfield Authority also uses tax incentives to stimulate the construction of affordable housing.
Affordability is defined in most cases as being rented to lessees earning 80% to 120% of the “area median income.” The city, in lieu of future tax collection, forgoes a portion of the property tax revenue to subsidize housing costs for a period ranging from five to 20 years, depending on the parameters of the project.
Legal Questions
Distributing tax incentives on a racial basis might be illegal. Judge Glock, senior fellow at the Manhattan Institute, told The Grand Rapids Herald that the city’s program is likely “operating close to the line of what the Supreme Court has called unconstitutional.”
Citing a 2022 Supreme Court ruling in the Students for Fair Admissions v. Harvard, Glock said the “explicit use of race or sex” by the city in its tax benefit distributions “likely runs afoul of the 14th amendment equal protection clause.”
Glock added that the Brownfield program and others like it often “drive up the cost of development” due to their attempt to manipulate labor supply.
He also said that similar programs “often involve a fair amount of fraud.”
“It’s not uncommon for local contractors to create pass-throughs,” he noted, meaning that contractors create front companies that meet the criteria in name only, but do not actually do the work themselves.
Though the legal status of the city’s policies favoring minority- or women-owned contracting businesses is dubious, the Brownfield Redevelopment Financing Act was amended in 2023 to encourage the construction of affordable housing.