Evaluating State and Local Business Incentives - American Economic Association

Abstract

This essay describes and evaluates state and local business tax incentives in the United States. In 2014, states spent between 5 USD and 216 USD per capita on incentives
for firms in the form of firm-specific subsidies and general tax credits, which mostly target investment, job creation, and research and development. States with higher
per capita incentives tend to have higher state corporate tax rates. Recipients of firm-specific incentives are usually large establishments in manufacturing, technology,
and high-skilled service industries, and the average discretionary subsidy is 178M USD for 1,500 promised jobs. Firms tend to accept subsidy deals from places that are
richer, larger, and more urban than the average county, and poor places provide larger incentives and spend more per job. Comparing winning and runner-up locations
for each deal, we find that average employment within the three-digit industry of the deal increases by roughly 1,500 jobs. While we find some evidence of direct
employment gains from attracting a firm, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level.