Local economic development policies can benefit local residents, but only if they are well designed to reduce costs per job created and increase benefits per job created. Promise: Investing in Community provides resources to understand how economic development policies can be designed both to increase these policies’ benefit/cost ratios and to broaden their benefits to low- and moderate-income groups.
What We’ve Learned
- Business tax incentives are often costly: only a minority of targeted jobs are created due to the incentives, and the fiscal benefits offset only a modest portion of direct costs.
- How incentives are paid for is key to their net benefits. For instance, education cuts reduce future wages.
- Incentives are more cost-effective if targeted at industries where they indirectly lead to more jobs being created in other local businesses.
- Customized services to small and medium-sized businesses are a more cost-effective way to create local jobs.
- Targeting distressed places increases the benefits of job creation, because created jobs are then more likely to go to the nonemployed.
- Reforming incentives is politically difficult for a number of reasons:
- Demand for tax incentives is unlimited.
- Voters like political leaders who “do something” about jobs.
- Long-term tax breaks may not be subject to annual budget discipline.
- Targeting distressed places is politically more challenging than providing the same incentives everywhere.
Calculating the Impact
The Bartik Benefit-Cost Model of Business Incentives allows the user to evaluate tax breaks provided by state and local governments to businesses to encourage local job growth. Users provide information on the incentives provided and the incented jobs, and the model then produces estimates of the effects of the program on jobs, on different types of income, and on the incomes of different income groups. Estimates are customized to a particular state and program/project start year.
Bartik Benefit-Cost Model of Business Incentives
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The Panel Database on Incentives and Taxes (PDIT), created by Upjohn Institute researchers, provides the most comprehensive available information on the tax incentives that state and local governments provide to new firms, and how such incentives have varied from 1990 to 2015, and across different industries and states.
Panel Database on Incentives and Taxes