Business incentives, including tax credits and other financial benefits, are a primary tool that states use to try to create jobs and strengthen local economies. Despite the central role incentives play in state economic development strategies, researchers and policymakers have long lacked reliable information on how much they cost and how their use varies from place to place. For that reason, new research from Timothy J. Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research and one of the leading national authorities on business incentives, fills a crucial information gap.
Bartik compiled a database of the incentives offered by 33 states and 47 cities to new or expanding businesses in select industries from 1990 through 2015. By analyzing the data and extrapolating to the country as a whole, he was able to draw important conclusions about how states and localities use incentives. This research, published by the Upjohn Institute in February, found that:
This study further demonstrates the significance of incentives to state fiscal and economic policy. It also shows that the details of incentive programs matter. State policymakers do not simply face a binary choice between providing incentives or not. Instead, decisions about which companies or industries are offered incentives and how the benefits are structured help determine the effectiveness of the programs.
To make these decisions successfully, policymakers need reliable, high-quality information on the results of their state’s incentives. Such information has not been available historically, but in recent years that has begun to change. Today close to 30 states have processes to regularly evaluate tax incentives, with more than 20 states adopting laws creating such processes since the start of 2012. In many of these states, professional staffs are digging into the details of tax incentives and offering lawmakers valuable guidance on how to improve program performance. As lawmakers use this evidence to reform incentives, these programs will be more likely to serve the needs of state budgets, businesses, and workers.
The Pew Charitable Trusts helped fund this work.
Josh Goodman is an expert on tax incentives with The Pew Charitable Trusts.