In 2000, the Council of State Governments reported that more than 40 states offered tax and financial incentives to businesses for activities such as relocating, expanding, buying equipment, or creating and maintaining jobs. The use of incentives to attract and retain businesses has been an issue of debate for many years. Proponents maintain that economic development incentives are an effective means by which states and communities can compete for jobs. Opponents contend that the dollars spent to provide incentives would be better used to support activities believed to have more impact on a community’s economic development, such as improvements to infrastructure and investments in education to develop a competitive labor pool. While states and localities compete with one another to attract businesses, some states and localities have attempted to curtail the use of economic development funds to relocate jobs. According to two policy groups promoting accountability in economic development, three cities—Austin, Texas; Gary, Indiana; and Vacaville, California—and nine states— Alabama, Connecticut, Florida, Iowa, Maryland, New Mexico, New York, Ohio, and Wisconsin—prohibit using city and state resources, respectively, to relocate jobs within their boundaries. For example, both policy groups state that the Gary, Indiana, city ordinance prohibits tax abatements for the relocation of existing jobs from outside the corporate limits of the city. One of the groups also said that in Puerto Rico, the governor may refuse any business application for tax incentives if doing so would adversely affect the business’ employees in any state in the United States. Regional entities also have established formal and informal agreements to curtail the competition for businesses and jobs within their boundaries. These entities include the Metro Denver Economic Development Corporation; the tri-county region comprising Broward, Miami-Dade and Palm Beach counties in Florida; and Contra Costa and Alameda counties in California. In 2006, the total number of unemployed workers was 6.8 million in the fourth quarter, compared to 145.6 million employed. According to the Bureau of Labor Statistics (BLS), employers reported that a total of 894,739 workers lost their jobs because of extended layoffs in 2006 that resulted from a variety of economic factors, such as bankruptcy and reorganizations. A BLS survey of employers found that 20,199 of these losses (about 2 percent) occurred because of business relocations within the United States, the majority across state lines. Another source—the National Establishment Time Series (NETS)—uses proprietary Dun & Bradstreet data on U.S. companies to track business relocations. According to a representative of the company that maintains the NETS data, more than 2.8 million businesses have relocated since 1990 and about 100,000 of these (or almost 4 percent) occurred across state lines. A number of federal programs fund or support economic development activities. In prior work, we identified activities that are directly related to economic development—planning economic development activities; constructing or renovating nonresidential buildings; establishing business incubators; constructing industrial parks; constructing and repairing roads and streets; and constructing water and sewer systems. These programs typically are available to applicants that include individuals; local, state, territorial, and tribal governments; and nonprofit organizations through loans, loan guarantees, and project and formula grants. Appendix II provides a description of the nine federal economic development programs that we identified as having nonrelocation provisions, including information about program funding and how the programs operate. We identified 17 large federal programs that state and local governments can use to attract businesses. These programs offer assistance to businesses in the form of loans and loan guarantees, grants, job-training services, and tax benefits as incentives to businesses. Of the 17 economic development programs, states appear to have marketed 14 as incentives for businesses. However, according to academic experts who study economic development incentives and site-selection consultants, the amount of federal funds used as incentives is likely more limited than the amount of state and local funds used as incentives. State and local governments have varying discretion over the use of the federal funds, but can leverage federal funds to free their own resources for incentives or for other purposes that support businesses. Finally, academic studies on incentives and site-selection consultants have questioned whether incentives offered by state and local governments influence a business’ decision to relocate or expand operations. We identified 17 large federal economic development programs that state and local governments can use as incentives to attract and retain businesses, based on a search of the CFDA database, Tax Expenditure Compendium, and state economic development Web sites. As shown in table 1, five agencies administer the 17 programs, which offer a range of assistance or services (such as loans, grants, tax benefits, and training programs) to businesses. Out of the 17 programs we identified, five were direct loan or loan guarantee programs: the SBA 7(a) and 504, USDA B&I, Farm Ownership Loans, and Farm Operating Loans; four were tax incentive programs: IRS’s New Markets Tax Credit, its two private activity bond programs, and HUD’s Renewal Communities; three were programs that support job training services: WIA Adult, Dislocated Workers, and Youth programs; and five were programs that offer more than one type of financial assistance (grants, direct or guaranteed loans, or tax incentives): the two HUD CDBG programs, HUD EZ, USDA EZ/EC, and USDA Community Facilities. State and local governments also can use federal economic development resources to supplement their existing resources to attract additional investment and potentially use federal economic development funds to free up money for incentives they otherwise would have spent on economic development. For example, according to USDA officials, EZs and ECs often leverage federal program resources to obtain other funds, thereby attracting businesses. Similarly, businesses located in EZs and ECs can claim various state and federal tax credits, including IRS’s Work Opportunity Tax Credit, which provides tax credits to employers hiring individuals residing in an EZ or EC. According to our January 2007 report on the New Markets Tax Credit program, these credits can be packaged with other types of incentives, such as EZ/EC incentives or state and local tax abatements, to make the investments in economically distressed communities more attractive to investors such as banks. We previously have reported that more than one-fourth of New Markets Tax Credit projects were located in federally designated EZs. State and local governments also can use federal economic development funds to support economic development activities, thereby freeing up state and local funds for business incentives or other uses. Based on our review of state economic development Web sites, states appear to market all but 3 of the 17 programs (Community Facilities Loans and Grants, Farm Ownership Loans, and Farm Operating Loans being the exceptions). The programs that appear to be marketed more than others are the CDBG programs, SBA’s 7(a) and 504 loan guarantees, and private activity bonds (at least 19 states appear to advertise each of these as incentives). Benefits from EZs, ECs, or Renewal Communities, and job- training programs funded with WIA funds were the next most marketed incentives, with at least nine states offering them. This appears to be somewhat consistent with what site-selection consultants told us about the specific federal incentives they see in business incentive packages. The consultants told us that they see CDBG loans funded with Entitlement and State block grants, private activity bonds, EZ/EC benefits and, increasingly, customized job-training funds in incentive packages. In contrast to the results of our Web site reviews, the consultants did not cite SBA loans as being among federal resources included in business incentive packages. Although federal programs are marketed as business incentives, the amount of federal funds used as incentives appears to be more limited than the amount of state and local funds used. While the precise amount of federal funds used as incentives is not available, the Congressional Budget Office (CBO) estimated that the federal government spent $27.9 billion to support commerce and business in addition to $2.2 billion on credit programs in 1995. CBO also indicated that the federal government provides the bulk of its support to businesses through tax provisions. CBO estimated tax revenue losses of at least $32.2 billion for the provision of the tax code that yielded the largest amount of direct support for businesses—depreciation of capital assets in excess of the alternative deprecation system—but did not provide total estimates of foregone revenue associated with all tax provisions. It is not clear from the CBO report whether and to what extent state and local governments also used these programs and tax provisions as incentives. We reviewed academic studies on economic development business incentives offered from 1995 to 2005 and interviewed the authors of these studies. The academic literature on economic business incentives generally focuses on state and local government incentives rather than federal incentives. Academic studies estimate that state and local governments spent from $20 to $50 billion annually on business incentives. While the amount of federal funds used as business incentives has not been measured to any great extent, some researchers with whom we spoke said that the amount of federal funds used as business incentives is likely limited compared to the amount of state and local funds used as incentives. One limitation in developing estimates of federal, state, and local funds spent on incentives is defining what constitutes a business incentive. For example, a state or local government might offer indirect benefits, such as infrastructure improvements, to attract or retain businesses, but these might not be counted in estimates as business incentives. Moreover, although the amount of federal economic development funds available as incentives appears to be limited, money can be fungible, or freely interchangeable, at the state and local level. Thus, even though the amount of federal funds used as incentives might be limited, state and local governments could leverage those funds to free up their own resources for incentives or for other purposes that support businesses.