Policy Concerns Regarding
the Use of Incentives
While every state and Puerto Rico use economic development incentives, the effectiveness, impact and true costs of those programs are greatly debated among researchers.
Although they continue to be a popular economic tool in many states, some state leaders are increasingly critical of programs that pull revenue away from a shrinking tax base without clear evidence of a payback.
Some of the criticisms of an incentive-focused development strategy include:
Incentives are a zero-sum game because they create bidding wars among states. One state luring business away from another with the promise of tax benefits does not create any new economic activity—it just transfers existing activity into another geographic location.
Some studies have shown a company’s decision to locate in a particular state has little to do with the incentives offered and more to do with the pre-existing assets of a state, such as workforce education levels, transportation capacity and access, housing affordability and a geography that is appropriately located for the firm’s needs.
Incentives are used inappropriately to correct weak spots in the economic climate, tax or regulatory infrastructure of a state. Correcting problems in a piecemeal manner prevents states from engaging in strategic planning to improve their overall business climate, including potentially necessary reforms to regulatory barriers, tax codes, and business permitting systems, workers’ compensation systems and labor relations.
The use of limited state dollars on incentives erodes the tax base, leaving critical services—such as transportation infrastructure or education—underfunded. In addition, a loss of tax dollars because of incentive programs could lead to additional taxes to make up the difference, which in turn leads to uncertainty, inequity or instability in the tax system.