Introduction to Special Issue: Learning More About Incentives

This special issue of Economic Development Quarterly (EDQ) focuses on state and local financial incentives, provided to businesses to spur state or local economic development. EDQ made a public request for papers on the causes or effects of incentives. Selected authors participated in an Upjohn Institute researchers’ workshop. Submitted papers went through the journal’s normal referee process. What are incentives? The incentives focused on here are financial assistance that is customized to individual businesses or industries, and is intended to boost business growth in a state or local area. Some incentives are tax credits. Some tax credits are taken against a tax liability, such as property taxes or corporate income taxes; other tax credits may be refundable, paid even if the firm’s taxes are zero. Some incentives are cash grants, which also are paid even if the firm’s taxes are zero. Examples of incentives include job creation credits or grants, property tax abatements, investment credits, and research and development (R&D) credits. In the United States, these incentives are mostly provided by state and local governments, not the federal government. Incentives annually cost $51 billion; $46 billion is provided by state and local governments (Bartik, 2019b). Incentives are controversial. One reason for controversy is that incentives “pick winners. ” Some firms or industries receive incentives, others do not. Will government incentives be based on politics, or on what project most benefits residents? For example, incentives go more to megacorporations than small business. Why? Perhaps because high-profile incentives enable governors or mayors to win reelection by showing they care about creating job opportunities (Jensen & Malesky, 2018). According to Slattery and Zidar (2020), “more than 30% of all establishments with over 1,000 employees receive discretionary subsidies, while the percentage is less than 0.2% for establishments with under 250 employees. ” If we are concerned about Amazon’s market power, is it in the public interest to give Amazon large incentives? Another reason for controversy: The costs of incentives are increasing. From 1990 to 2015, incentive costs tripled (Bartik, 2017). Incentive wars may be intensifying. In 2017, Wisconsin gave Foxconn a huge incentive: The Foxconn incentive was equivalent to subsidizing the new facility’s wages by 30% for 20 years—over 10 times the typical U.S. incentive (Bartik, 2019a). Some incentive offers to Amazon’s so-called “Headquarters 2” project were also 10 times the usual incentive per job (Leroy et al., 2019). Other large firms have also received incentives of hundreds of thousands of dollars per job (Good Jobs First, 2019; Slattery & Zidar, 2020). Suppose current incentives expanded tenfold. Then, incentives would cost 30% of state and local tax revenue (Bartik, 2019a). This cost would lead to either large cuts in public services, large increases in household taxes, or more of probably both. Are incentives’ costs justified by benefits? If incentives have a sufficiently large ratio of jobs created to dollar costs, and if the created jobs can be accessed by residents, perhaps so. Access to more and better jobs increases residents’ earnings in both the short run and long run. If a person can get a good job, this improves their job skills and reduces problems such as substance abuse, increasing the odds of long-run success (Bartik, 2019a). To set the stage for this special issue’s papers: What did we know about incentives’ costs and benefits before this special issue?