Evaluating State and Local Business Tax Incentives

Cailin R. Slattery, Owen M. Zidar

NBER Working Paper No. 26603
Issued in January 2020
NBER Program(s):Program on the Development of the American Economy, Economic Fluctuations and Growth Program, Industrial Organization Program, International Trade and Investment Program, Labor Studies Program, Public Economics Program, Political Economy Program, Productivity, Innovation, and Entrepreneurship Program

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.

Acknowledgments

Machine-readable bibliographic record – MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w26603

James Poterba, president

James Poterba is President of the National Bureau of Economic Research. He is also the Mitsui Professor of Economics at M.I.T.

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