Evaluating State and Local Business Incentives
Journal of Economic Perspectives
vol. 34,
no. 2, Spring 2020
(pp. 90-118)
(Complimentary)
Abstract
This essay describes and evaluates state and local business tax incentives in the United States. In 2014, states spent between 5 USD and 216 USD per capita on incentives for firms in the form of firm-specific subsidies and general tax credits, which mostly target investment, job creation, and research and development. States with higher per capita incentives tend to have higher state corporate tax rates. Recipients of firm-specific incentives are usually large establishments in manufacturing, technology, and high-skilled service industries, and the average discretionary subsidy is 178M USD for 1,500 promised jobs. Firms tend to accept subsidy deals from places that are richer, larger, and more urban than the average county, and poor places provide larger incentives and spend more per job. Comparing winning and runner-up locations for each deal, we find that average employment within the three-digit industry of the deal increases by roughly 1,500 jobs. While we find some evidence of direct employment gains from attracting a firm, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level.Citation
Slattery, Cailin, and Owen Zidar. 2020. "Evaluating State and Local Business Incentives." Journal of Economic Perspectives, 34 (2): 90-118. DOI: 10.1257/jep.34.2.90Additional Materials
JEL Classification
- H25 Business Taxes and Subsidies including sales and value-added (VAT)
- H32 Fiscal Policies and Behavior of Economic Agents: Firm
- H71 State and Local Taxation, Subsidies, and Revenue
- R32 Other Spatial Production and Pricing Analysis
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