The vast majority of tax incentives aimed at attracting and retaining businesses ultimately leave states worse off than if they had done nothing, researchers report.
For the study, researchers examined data from 32 states from 1990-2015. The researchers evaluated all of the state and local tax incentives available in the 32 states, as well as an array of economic, political, governmental, and demographic data.
A computational model assessed the extent to which the effects of attracting or retaining businesses in a state offset the state’s related tax incentives.
“We found that, in almost all instances, these corporate tax incentives cost states millions of dollars—if not more—and the returns were minimal,” says corresponding author Bruce McDonald, an associate professor of public administration at North Carolina State University.
“In fact, the combination of costly tax incentives and limited returns ultimately left states in worse financial condition than they were to begin with.”
The two exceptions to the finding were job creation tax credits and job training grants.
You Don’t Always Get What You Want: The Effect of Financial Incentives on State Fiscal Health
Source: Bruce D. McDonald III, J. W. Decker, Brad A. M. Johnson, Public Administration Review, Early View, First published: February 27, 2020
From the abstract:
Governments frequently use financial incentives to encourage the creation, expansion, or relocation of businesses within their borders. Research on financial incentives gives little clarity as to what impact these incentives may have on governments. While incentives may draw in more economic growth, they also pull resources from government coffers, and they may commit governments to future funding for public services that benefit the incentivized businesses. The authors use a panel of 32 states and data from 1990 to 2015 to understand how incentives affect states’ fiscal health. They find that after controlling for the governmental, political, economic, and demographic characteristics of states, incentives draw resources away from states. Ultimately, the results show that financial incentives negatively affect the overall fiscal health of states.