Evaluating State and Local Business Tax Incentives

Citation:

Slattery, Cailin, and Owen Zidar. “Evaluating State and Local Business Tax Incentives”. Journal of Economic Perspectives (in preparation) (Working Paper). Print.

Abstract:

We describe and evaluate state and local business incentives in the United States. We use new data sets at the firm and state level from Slattery (2019) to characterize these incentive policies, describe the selection process that determines which places and firms give and receive incentives, and then evaluate the economic consequences. In 2014, states spent between $5 and $216 per-capita on incentives for firms in the form of tax credits, job training, grant programs, and infrastructure spending. Recipients are usually large establishments in manufacturing, technology, and high-skilled service industries, and the average discretionary subsidy is $157M for 1,660 promised jobs. Firms accept 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 in a bigger and more recent sample than in prior work, we find that average employment within the 3-digit industry of the deal increases by nearly 2000 jobs. There is some weak evidence of employment spillovers and establishment entry within the broader sector, but there is no detectable impact on overall county-level employment or economic growth. At the state level, increases in incentive spending tend not lead to increases in establishment entry as poorer places are more likely to provide larger incentives. Overall, while we find some evidence of direct employment gains from attracting a firm, we do not find strong evidence in support of local tax incentives increasing broader economic growth at the state and local level.

Last updated on 07/19/2019