Are Tax Incentives Good for Cities and States?

• Author: Barrett, Katherine
• Position: PERSPECTIVE

A little more than 30 years ago, the State of Alabama used hundreds of millions of dollars in tax incentives to attract a giant Mercedes-Benz plant to the state. That was the beginning of an escalating battle on the part of cities, counties, and states to attract business by handing over large amounts of taxpayer dollars.

According to David Brunori, visiting professor of public policy at George Mason University and senior director at RSM US--which provides audit, tax, and consulting services to the public sector--"they've been proliferating ever since, and the number has grown every year since 1992. In fact, there's a whole industry that does nothing but look for tax incentives for companies."

The big question, of course, is whether this is genuinely good business for cities, which generally give up property taxes, and states, which largely forfeit income taxes. Most experts, as well as much academic literature, say that the answer to this is no.

Shayne Kavanagh, senior manager of research in GFOA's Research and Consulting Center, said, "There is compelling evidence that these things are often not effective." He noted that many places use tax incentives largely because they don't want to take the chance of being the only player who isn't in the game--even if there's little to nothing to win. "It's an arms race phenomenon in games theory," he said. "If you don't do it, the next guy will."

The costs of tax abatements can be huge, and when property tax money is used in cities, those dollars aren't available for other important services. The obvious losers are the schools, which tend to be the largest single users of property taxes. According to a report by Good Jobs First, "Schools in New York State lost at least $1.8 billion in fiscal year 2021 to corporate tax abatements." (1)

The irony here is obvious. Businesses are attracted by a well-educated workforce, and if the schools suffer and fail to attract businesses in any one year, it makes the city less attractive for further economic development in the future. To make matters worse, there isn't much evidence that the tax incentives are a powerful economic incentive tool in the first place.

Nathan Jensen, professor of government at University of Texas at Austin and an authority on the topic, said: "Academic research shows that the majority of firms would have made the same decision, to relocate, expand or stay, even without incentives. In these cases, incentives are just a transfer of...