Study: Corporate Tax Incentives Do More Harm Than Good to States

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A study of tax incentives aimed at attracting and retaining businesses finds that the vast majority of these incentives ultimately leave states worse off than if they had done nothing.

For the study, researchers at North Carolina State University examined data from 32 states from 1990-2015. The researchers evaluated all of the state and local tax incentives available in the 32 states, as well as an array of economic, political, governmental and demographic data. A computational model assessed the extent to which the effects of attracting or retaining businesses in a state offset the state’s related tax incentives.

“We found that, in almost all instances, these corporate tax incentives cost states millions of dollars – if not more – and the returns were minimal,” says Bruce McDonald, an associate professor of public administration at NC State and corresponding author of the study. “In fact, the combination of costly tax incentives and limited returns ultimately left states in worse financial condition than they were to begin with.”

The two exceptions to the finding were job creation tax credits and job training grants.

“In both cases, the cost of the incentives was more than offset by tax revenue created by new jobs or by previously underemployed people finding higher-paying work,” McDonald says.

“The takeaway message here is that maybe states shouldn’t be offering these tax incentives. Or, at the very least, states need to examine their assumptions about the impact these incentives actually have, with the exception of incentives explicitly tied to job creation and training.”

The 32 states included in the study account for about 90% of state and local tax incentives nationally. The states were Alabama, Arizona, California, Colorado, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Virginia, Washington and Wisconsin.

The paper, “You Don’t Always Get What You Want: The Effect of Financial Incentives on State Fiscal Health,” is published in the journal Public Administration Review. The paper was co-authored by John Decker and Brad Johnson, who are graduate students at NC State.

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Note to Editors: The study abstract follows.

“You Don’t Always Get What You Want: The Effect of Financial Incentives on State Fiscal Health”

Authors: Bruce McDonald, John Decker and Brad Johnson, North Carolina State University

Published: Feb. 27, Public Administration Review

DOI: 10.1111/puar.13163

Abstract: Governments frequently use financial incentives to encourage the creation, expansion, or relocation of businesses within their borders. Previous research on financial incentives have given little clarity as to what impact these incentives may have on the government. While incentives may draw in more economic growth, they also pull resources from the government’s coffers and may commit future funding for public services that benefit the incentivized business. Using a panel of 32 states from 1990 to 2015, we seek to understand how incentives affect a state’s fiscal health. After controlling for the governmental, political, economic, and demographic characteristics of a state, we find that incentives draw resources away from the state. Ultimately, the results show that financial incentives negatively affect the overall fiscal health of a state.

This post was originally published in NC State News.