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NBER research questions value of state business tax incentives

February 13, 2020
By: Connor LaVelle

In 2015, state and local business incentives across the nation combined for a total annual cost of roughly $45 billion, according to Timothy Bartik's 2017 report for the Upjohn Institute for Employee Research. New research suggests states and regions trying to attract business through the use of firm-specific tax incentives may want to try another tactic. The National Bureau of Economic Research (NBER) recently released a working paper analyzing the impacts of business tax incentives, finding little evidence of long-term benefit for the local economies. Evaluating State and Local Business Tax Incentives examines three major state and local business tax instruments used to attract potential industrial development: lowering corporate tax rates, narrowing the corporate base, and providing firm-specific tax incentives.

The paper’s authors, Cailin R. Slattery of Columbia University and Owen M. Zidar of Princeton University, found broad use of incentives, but questionable impact. "State and local governments are devoting substantial resources towards attracting firms and corporate capital," the authors say, but go on to conclude that there does not seem to be "strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level." In addition to the lack of broad economic growth, the authors also determined that "firms tend to accept subsidy deals from places that are richer, larger, and more urban than the average county," while "poor places provide larger incentives and spend more per job." With this in mind, the report calls into question how helpful business tax incentives truly are to a community in need of economic development. While the researchers report that there are direct employment gains from attracting a firm through tax incentive programs, they did not find any substantial evidence that "subsidized firms have employment spillovers in the local economy."

The report does outline potential solutions to the issues surrounding these business tax instruments, suggesting that these tax incentive programs target economically struggling regions of the country and that firms benefiting from these programs be required to hire local residents to fill the newly created jobs. Slattery and Zidar also stress the importance of improving the data that is collected, writing that "new reporting requirements still give substantial discretion to governments in terms of what to report and how to report it," and that "the data are not yet uniform, comprehensive, or high-quality." While business tax incentives are by no means a total failure, the authors posit that it will take local, state and federal cooperation for these incentives to provide sustainable success within their regions moving forward.

The report can be found here: https://www.nber.org/papers/w26603

research, tax incentives