Do Economic Incentives Work? Evaluating the Effect of Incentives Designed to Attract Investment on State-Industry Growth Rates

Abstract

Economic development scholars remain divided over whether economic incentives designed to attract businesses to a locality ultimately promote job growth, higher wages and economic development or just give away taxpayer dollars. While some research has found that economic incentives may nudge a company to choose one location over a similar location, others have argued that companies make location decisions based on strategic considerations like human capital and supply chains, and not based on economic incentives. At the same time, even if companies are choosing to locate to a particular locality based on an economic incentive package, it is not clear that the growth they bring is enough to compensate for the loss of tax revenue. In this paper we evaluate the impact of five different types of state-level economic incentives on GDP growth. We use a novel Panel Database on Incentives and Taxes established by the W.E. Upjohn Institute for Employment Research that contains data on marginal business taxes and business incentives for 45 industries in 47 cities in 33 states collected from 1990 to 2015. Using several estimation strategies, including short and long term two-way fixed effects regression modeling and propensity score stratification, we find that economic incentives in the aggregate have a positive impact on state-industry GDP growth but the effects differ across economic incentive types.