Q & A with new economist Evan Mast on local tax break competition and business location

New economist Evan Mast responds to three questions concerning his working paper titled "Race to the Bottom? Local Tax Break Competition and Business Location."

Q: What are the potential tradeoffs of local government tax breaks?
A: On one hand, these tax breaks could encourage businesses to locate in the places that would benefit most from the economic activity. This would happen if the towns that have the most to gain from attracting a particular business also offer the largest tax breaks.  On the other hand, you would expect to see competition between local governments increase the tax breaks that businesses get, which is bad from a government’s perspective.

Q: How intense is competition between local governments?
A: It seems that competition plays a major role in the tax breaks that local governments offer, at least in New York State (the setting for this paper). I find that adding another competitor within 15 miles of a town causes the town to give about 40 percent more business tax breaks in a given year. This is interesting because it suggests that local competition is quite important—it’s not the case that competition from other states is totally driving tax break generosity. Moreover, this effect seems to fade out pretty rapidly as the distance to competitors increases to, for example, 25 miles, which suggests that businesses are often considering pretty small geographic areas.

Q: Are there potential gains from collaboration between local governments?
A: I run some simulations of what would happen to tax breaks and business locations if we were to get rid of town tax breaks and instead allow only counties to offer tax breaks. This is basically a policy that forces the towns within a county to collaborate rather than compete. The simulations suggest that this policy change would have a big effect on total tax breaks, reducing the statewide total by about 30 percent. In contrast, I simulate that about 90 percent of firms locate in the same town whether towns can offer tax breaks or not. On net, this suggests that collaboration would probably be a good thing for local governments, as it increases their revenue substantially and does not seem to change firm locations for better or worse.