They work best in small areas, where they can attract businesses that would otherwise have set up shop nearby. Finally, as city leaders no doubt know, enacting tax cuts takes significant political capital, which may crowd out other interventions, such as altering the mix of taxes, say, toward taxing land value rather than property value. As with infrastructure, there may be cities where taxes are so high, relative to their suburbs and other cities, that reducing them may be an important first step in a sound economic development plan. But these cases are likely to be the exception rather than the rule. Whether these tax deals ultimately make sense depends first on what firms would have done in their absence.
Special deals can increase growth only if they change firm location decisions.
But it is not easy for policymakers to distinguish between firms that require special treatment and those that do not want it. As a result, cities often give special deals to firms that would have chosen to locate or to remain there regardless. Even when incentives do affect firm location, they may not be advisable. Because taxes have only a small effect on where firms locate, special tax incentives can be effective only if they are relatively generous. By implication, the jobs and income saved or created would have to be on a similar scale to justify the expense.