Handouts for Businesses
Throughout the country, state and local governments have employed economic development incentives in an attempt to catalyze local economic conditions. These incentives often take the form of tax breaks to businesses. Sometimes, they take the form of grants. Government officials claim that these measures create jobs, and otherwise enhance general economic growth.
Undoubtedly, such efforts surely claim their share of political fanfare and newspaper headlines. However, there are two vital questions related to these economic development incentives that we should carefully consider.
- Do the firms that are offered incentives create more jobs or do more business than those that didn’t receive incentives?
- If so, at what cost?
Thankfully, there are an abundance of studies on this issue that we can look at. Overwhelmingly, the evidence suggests that the benefits don’t outweigh the costs. Those benefits that do materialize are minor in comparison to the costs borne to provide such incentives.
Economic Development Incentives are a Bad Idea
One such study, conducted in 2020 by the Mackinac Center, examined nearly 2,000 Michigan firms who received economic development incentives any time between 1990 and 2015. Their analysis found that incentivized firms experienced 7.1% more employment and 9.9% increases in sales relative to their non-incentivized counterparts.
However, those increases came with a price tag that amounted to nearly $600,000 per job.
Staggering as that number is, there are other overlooked costs in the economic development incentive conversation. Namely, opportunity costs. What else could policymakers have done with the taxpayer money used for these incentives?
Examples that immediately come to mind include the provision of more public goods such as enhancing infrastructure, the court system, or the like. Another example is providing widespread tax reductions – a strategy with a vastly more robust body of evidence when it comes to enhancing economic activity in a given location.
Furthermore, there is limited evidence that such economic development incentives are the nudge that proponents claim. A 2018 study from the W.E. Upjohn Institute for Employment Research estimates that targeted economic development incentives are the deciding factor in 2-25% of firm location decisions. In other words, 75-98% of firms locating in a given area would have done so absent the incentive. The study author, Timothy Bartik, calls this the “but for” percentage.
The research combination from Mackinac and the Upjohn Institute illustrate a sobering reality: targeted economic development incentives are incredibly costly for the amount of jobs and business they truly generate for the targeted firms. Moreover, they rarely are the deciding factor. Instead, these programs are akin to windfalls for the incentivized firms.
Rather than focusing on targeted economic development incentives to spur the economy, lawmakers should focus on the tried and true methods – lower overall tax burdens, reasonable regulatory structures, and broad economic freedom.
Jessi Troyan is the Policy & Development Director for the Cardinal Institute for West Virginia Policy.