Working Paper: NBER ID: w17466
Authors: R. Alison Felix; James R. Hines Jr.
Abstract: Many American communities seek to attract or retain businesses with tax abatements, tax credits, or tax increment financing of infrastructure projects (TIFs). The evidence for 1999 indicates that communities are most likely to offer one or more of these business development incentives if their residents have low incomes, if they are located close to state borders, and if their states have troubled political cultures. Ten percent greater median household income is associated with a 3.2 percent lower probability of offering incentives; ten percent greater distance from a state border is associated with a 1.0 percent lower probability of offering incentives; and a 10 percent higher rate at which government officials are convicted of federal corruption crimes is associated with a 1.2 percent greater probability of offering business incentives. TIFs are the preferred incentive of communities whose residents have household incomes between $25,000 and $75,000; whereas TIFs are much less commonly offered by communities whose residents have household incomes below $25,000. The need to finance TIFs out of incremental tax revenues may make it infeasible for many of the poorest of communities to use TIFs for local business development.
Keywords: tax incentives; business development; local government; economic development
JEL Codes: H25; H71; H73
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| 10% increase in median household income (D19) | 32% decrease in the likelihood of offering incentives (M52) |
| 10% increase in distance from a state border (H73) | 10% decrease in the likelihood of offering incentives (M52) |
| increase in the rate of federal corruption convictions by 1 per 100,000 residents (K42) | 12% greater probability of offering business incentives (R38) |
| communities with significant populations of households earning between $25,000 and $75,000 (R23) | more likely to offer TIFs (R38) |
| communities with very low-income households (I32) | more inclined to provide tax abatements or credits (H20) |