Accounting for State Authorization in Local Economic Development Policy Usage

• Date: 01 March 2018
• DOI: 10.1177/0160323X17728780
• Published date: 01 March 2018
• Subject Matter: Research Notes

Research Note
State and Local Government Review
2018, Vol. 50(1) 24-36
Accounting for State
ª The Author(s) 2017
Reprints and permission:
Authorization in Local
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DOI: 10.1177/0160323X17728780
Economic Development
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Policy Usage
Eric J. Stokan1
Abstract
This article empirically tests the impact of failing to account for state-level authorization when
explaining the factors that lead municipalities to use tax abatements, tax increment financing, and
enterprise zones. Although existing research implicitly assumes that state-level authorization exists,
this article demonstrates that this unfounded assumption leads to biased estimates using the 1999,
2004, and 2009 International City/County Management Association (ICMA) Economic Develop-
ment Survey data on a nationwide set of municipalities. This article refines what is known about the
factors, leading to the usage of these three policies before offering implications for practitioners and
researchers of local economic development.
Keywords
local economic development, tax incentives, federalism, research design
It is no surprise that state and local govern-
This complex interplay between states’
ments try to bolster their economies. In 2012,
powers to authorize and local governments’
Louise Story, in a series of New York Time arti-
decision to use economic development incen-
cles, estimated that states and local govern-
tives has received little scholarly attention
ments were “giving up more than US$80
(Rubin and Rubin 1987; Reese, Larnell, and
billion” annually on economic development
Sands 2010; Stokan 2013). Most research has
incentives. Although states provide the legal
failed to account for this relationship when con-
authority for the usage of these incentives, it
sidering why local governments use specific
is up to local governments to use them as a
economic development policies, save for Reese
means to attract businesses and people. Not all
and Malmer (1994) who understood that
states authorize every economic development
policy, nor do all local governments use each
for which they have authorization. Arizona, for
1 Department of Political Science, Towson University,
example, is the only state in the history of the
Towson, MD, USA
United States to provide no authorization for
tax increment financing (TIF) to its local gov-
Corresponding Author:
Eric J. Stokan, Department of Political Science, Towson
ernments. Thus, local governments in Arizona
University, LA 3228, 8000 York Road, Towson, MD 21252,
have no legal mechanism to use TIFs as a
USA.
means to bolster their local economies.
Email: estokan@towson.edu

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Stokan
25
accounting for state authorization was impor-
exist to development. The article concludes
tant. Despite this, their article accounted for a
with methodological and substantive implica-
single economic development incentive and did
tions for practitioners and researchers alike.
not analyze the difference when failing to
account for authorization.
Without accounting for whether state
Literature Review
authorization exists, most research implicitly
There are several important factors that have
assumes, an untenable assumption, that state
been found to influence the decision to offer
authorization has no bearing on whether local
economic development incentives, each of
governments use these financial incentives.
which are reviewed here.
Rather than restrict the analyses to only those
states and time points where state-level author-
Competition
ization for policies exist, previous research
lumps together all cases and assumes that local
Rubin and Rubin (1987) and Rubin (1988) find
governments not using particular economic
that local governments were driven more by
development policies are not doing so as a
politics than economics in their decisions.
result of local reasons—rather than as a result
Rather than choosing the policy that gave the
of not having the legal authority from the state.
highest rate of economic return, economic
This article directly tests this assumption by
developers might use all of the approaches in
analyzing the usage of economic development
their tool kit and hope that one or more would
policies in the traditional way (all cases lumped
be successful. Whether the economy improved
together irrespective of state authorization) and
as a result of the policies or not, economic
directly compares the results to the restricted
developers and politicians would take credit for
set of cases (only those cases where state
their impacts (Wolman and Spitzley 1996).
authorization exists). This comparison directly
Thus, credit claiming exists irrespective of
and empirically tests the level of bias intro-
whether it was the economic development pol-
duced when failing to account for authoriza-
icy that generated the economic gains. For
tion. This bias ranges by type of policy and
municipalities, the political costs of failing to
explanatory predictor. This research provides
adopt an incentive and not attracting a firm are
the first test of that bias for three policies—tax
greater than attracting a firm at an exorbitant
abatements, TIF, and enterprise zones.
cost. It is for this reason that competition is con-
This article makes several contributions to
sidered one of the most important predictors of
the literature. Methodologically, it estimates
economic development incentive usage
the level of bias introduced as a result of failing
(Anderson and Wassmer 1995; Clarke and
to account for state-level authorization of these
Gaile 1989; Donovan 1993; Fleischman,
economic development incentives (tax abate-
Green, and Kwong 1992; Friedland 1983; Kan-
ments, TIF, and enterprise zones). The analysis
tor 1987; Overton 2016; Reese 2006; Reese,
proceeds by estimating the standard relation-
Larnell, and Sands 2010; Rubin 1986; Stokan
ships found in the literature with and without
2013; Tiebout 1956; Peterson 1981; Wolman
state authorization, and the differences between
1988; Wolman and Spitzley 1996). As a note,
the estimators suggest the level of bias intro-
which is very standard in this literature, most
duced when failing to account for authoriza-
extant research relies on measures of perceived
tion. Substantively, it provides more precise
competition. This is because most of the data in
estimates on the factors that bring about the
those studies, as well as this one, rely on the
usage of these incentives. Additionally, greater
ICMA Economic Development Survey where
refinement in these factors is offered as it
those principally responsible for economic
relates to the perceived levels of competition,
development are asked about each of the fac-
the types of political actors involved in eco-
tors. The measure is therefore their perceived
nomic decision-making, and the barriers that
level of competition. This has been shown to

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26
State and Local Government Review 50(1)
Table 1. Visualizing the Data Analytic Process.
Local Uses Tax
Local Has State Authorization
Perceived Nearby
Problem with
Case
Abatement
for Tax Abatement
Competition
Traditional Method
1
1
1
0
No
2
1
1
1
No
3
0
1
0
No
4
0
1
1
No
5
0
0
0
Yes
6
0
0
1
Yes
Note: Column 1 represents whether the local government uses a tax abatement. They can only use this policy if state author-
ization exists. Cases 5 and 6 represent the problem cases. In traditional research, these cases would be included. However,
the reason that the local government may not be using a tax abatement is that it does not have state authorization. This fact
would be missed when failing to restrict the observations to only those with state authorization.
have a strong impact on the usage of economic
These latter two studies focused on statewide,
development policies, which leads to the fol-
rather than local option, policies. Local
lowing hypothesis:
unemployment rates would have less bearing
than state rates, when states decide to offer
Hypothesis 1a: Greater competition from
incentives. When municipalities have higher
other governments increases the probability
unemployment rates, it puts pressure on
that each of these policies (tax abatements,
politicians and economic developers at the
enterprise zones, and TIF) will be used.
local level to attract firms to their locality.
Hypothesis 1b: Local government competi-
Conversely, when unemployment is lower,
tors that are geographically closer will have
governments feel less pressure to use resources
stronger effects in the following way:
to attract firms. This suggests the following
hypothesis:
Hypothesis 2: Higher unemployment rates
Unemployment
will increase the probability that each policy
is used.
Local governments are responsible for provid-
ing an adequate supply of jobs to the community.
Many politicians and economic developers see
this as their primary mission. Even today with
Economic Development Participants
an expanded definition of economic develop-
Participants in economic development. Each eco-
ment into areas of income equality and sustain-
nomic developer, or individually principally
ability, creating new jobs is one of the most
responsible for economic development in the
important goals. The unemployment rate of
municipality, is asked “which of the follow-
municipal residents can be taken as one indica-
ing participants are involved in developing
tor of whether there is an adequate supply of
the local government’s economic develop-
jobs in a municipality. Unemployment rate has
ment strategy?” A long list of possible parti-
a positive...