Working Paper: NBER ID: w26603
Authors: Cailin R. Slattery; Owen M. Zidar
Abstract: This essay describes and evaluates state and local business tax incentives in the United States. In 2014, states spent between $5 and $216 per capita on incentives for firms in the form of firm-specific subsidies and general tax credits, which mostly target investment, job creation, and research and development. Collectively, these incentives amounted to nearly 40% of state corporate tax revenues for the typical state, but some states' incentive spending exceeded their corporate tax revenues. States with higher per capita incentives tend to have higher state corporate tax rates. Recipients of firm-specific incentives are usually large establishments in manufacturing, technology, and high-skilled service industries, and the average discretionary subsidy is $178M for 1,500 promised jobs. Firms tend to accept subsidy 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 roughly 1,500 jobs. While we find some evidence of direct employment gains from attracting a firm, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level. Although these incentives are often intended to attract and retain high-spillover firms, the evidence on spillovers and productivity effects of incentives appears mixed. As subsidy-giving has become more prevalent, subsidies are no longer as closely tied to firm investment. If subsidy deals do not lead to high spillovers, justifying these incentives requires substantial equity gains, which are also unclear empirically.
Keywords: business tax incentives; economic development; employment; state corporate taxes
JEL Codes: H2; H25; H71; R11; R3; R5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| employment in targeted 3-digit industry (L80) | broader economic growth at state and local levels (H79) |
| state and local business tax incentives (H71) | broader economic growth at state and local levels (H79) |
| firm-specific tax incentives (H32) | broader economic growth at state and local levels (H79) |
| incentives (M52) | mixed spillovers and productivity effects (O49) |
| state and local business tax incentives (H71) | employment in targeted 3-digit industry (L80) |