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:
- Incentives are large. For new or expanding export businesses—which are frequently the focal point of state economic development policy—incentives are on average worth 30 percent of the state and local business taxes that these companies owe. Incentives are much smaller for nonexport businesses.
- The value of incentives is increasing. In relation to business costs, incentives for new or growing exporters nearly tripled from 1990 to 2015. However, the increases began to slow in the 2000s. Some states have scaled back their use of incentives in recent years.
- Use of incentives varies significantly by state. As of 2015, the states where incentives reduced costs for these businesses by the largest percentages included New Mexico, New York, Louisiana, Tennessee, and New Jersey. Neighboring states use incentives to different degrees: New York’s and New Jersey’s incentives are much larger than Connecticut’s; New Mexico’s are much bigger than Arizona’s; and Louisiana’s are much larger than Texas’. States that impose higher business taxes do not necessarily offer more incentives to compensate, nor do states with lower business taxes necessarily offer smaller incentives as a result.
- Policymakers could redesign incentives to get better results. Bartik argues that incentive programs are most effective when they target industries that pay high wages, employ more workers, and spend more on research and development. He finds that incentives are somewhat more generous for industries with these characteristics but not enough to achieve optimal economic results.
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.