When it comes to politics and policy, the economy is always a top priority. How to generate job growth and develop prosperous communities are perennial questions. And the policy options are vast. Changes to education, infrastructure, the environment, wages and work hours, the criminal justice system, pensions, health care and tax policy all can affect economic development.
Despite the breadth of the economic development umbrella, however, the term itself is often associated exclusively with business tax incentives. Most state economic development offices are charged with recruiting or retaining businesses, and they rely on tax incentives to accomplish the goal. In their efforts to spur growth using these incentives, states and local governments forgo between $40 billion and $70 billion in revenue annually.
The incentives come in different forms: breaks or credits on property, sales or income taxes; issuance of tax-exempt industrial revenue bonds or low-cost loans; sale of underpriced land; customized workforce training; or assistance with regulations. Some are available to all businesses; many are not.
Often, states gear tax credits or other incentives specifically toward large multinational corporations. Indiana, for example, provided a $7 million incentive package to the Carrier Corp. in 2017 to keep jobs in the state, Virginia recently offered Amazon a $750 million package to establish a new headquarters there, and Wisconsin offered Foxconn Technology Group a $4.8 billion package in 2018 to build a new manufacturing plant.
The long-standing debate on targeted incentives is whether they actually work. Are they effective economic development tools, or do they primarily benefit large, individual companies? Despite mixed evidence on their success, tax incentives aren't going away anytime soon.
Effective Tool, or Waste of Revenue?
Proponents believe that coaxing large, successful businesses to a region can create jobs and generate new investments, creating new wealth for entire communities and generating new tax revenue for state and local governments. For businesses choosing between cities that offer similar markets, supplies and labor, lowering the cost of doing business by reducing tax burdens could be a deciding factor.
The results of landing a large employer can be immediately tangible. Mercedes-Benz had a significant impact on Tuscaloosa, Ala., when it relocated in the early 1990s after being granted $250 million in tax incentives. "Since 1999, German companies have invested nearly $9 billion in Alabama operations, creating 15,500...