New book finds job-creation tax incentives mostly fail, improvements recommended

November 21, 2019

Tax incentives don’t affect a company’s decision on where to locate in a majority of cases, according to a new book. Making Sense of Incentives: Taming Business Incentives to Promote Prosperity by Timothy J. Bartik of the W.E. Upjohn Institute for Employment Research does conclude that better-designed tax-incentive programs “when combined with business services and other smart policies … can be a cost-effective way to promote inclusive local economic growth.”

Bartik’s book began after he was asked by the Wisconsin Department of Administration to evaluate the state’s $4 billion in tax incentives to Foxconn, which promised to create 13,000 new jobs. He determined the Foxconn incentives were equivalent to “subsidizing 30 percent of Foxconn’s wages for 20 years, over 10 times the current average incentive offer.” These incentives, plus the ones recently offered to Amazon could lead to a “mushrooming” of ill-advised incentive packages, tax increases and “may increasingly inhibit the ability of state and local governments to provide public services, such as schools and roads.”

The book describes economic development tax incentives, why they are tempting and problematic, suggestions for policymakers on how to create better programs, and presents what Bartik describes as an “ideal” incentive program.

Bartik writes that not all the companies that receive tax incentives “were induced to locate, expand or retain jobs because of the incentive.” They would have chosen the location without incentives, as other factors, such as local wage rates, worker skill sets and access to national markets, impact these decisions.

Bartik and John C. Austin of the Brooking Institute combined to write a blog post outlining the book, which tackles two basic issues: Do tax incentives work, and what can be done to improve these programs.

Do they work?

Bartik found that in at least 75 percent of all cases, tax incentives do not determine a business’s decision on where to locate and do not pay for themselves. And, while they can create additional jobs “they also bring in new workers from outside the city or state, which raises costs to public services that offset at least 90 percent of any increased revenue.”

Bartik described four ways to improve tax-incentive policies:

Target the right businesses, companies that will provide a multiplier effect for already-established companies in the area.

Target the right geographic areas, especially “economically distressed areas with more available labor that is not employed.” By doing this, Bartik believes the share of jobs that go to local residents “can be two to three times as great, compared to already-booming areas.”

Target the right incentives, ones that are structured so the cash incentives are upfront, include incentives to hire locally, and do not negatively impact a local or state government’s public service budgets.

Evaluate incentives by comparing assisted and unassisted companies and geographic areas.

The bottom line, according to Bartik and Austin, is incentives can be beneficial. “But not at any cost, or with poorly designed incentives.”

tax incentives