Does Increasing Available Non-Tax Economic Development Incentives Result in More Jobs?

Abstract

This paper examines the job creation effects of state and local non-tax incentives for capital investment, which are relatively understudied in the literature. The paper's primary contribution is the creation of an Incentive Environment Index (IEI) from state constitutional provisions that limit and structure the ability of state and local governmental entities to aid private enterprises. Comparing estimation results across methods reveals that unobserved heterogeneity results in overstatement of policy effects. The most robust estimates indicate that increasing the ability of governments to aid private enterprise has a signifcant negative medium-term effect on rural county employment levels but otherwise has no effect on employment levels or growth.

Do Capital Tax Incentives Attract New Businesses? Evidence Across Industries From the New Markets Tax Credit

“…However, we also find that the tracts that were eligible for the program experienced declines in employment at new wholesale and transportation firms, as well as decreases in the number of new firms in FIRE and some evidence of a decline in services. Given how the NMTC was allocated, this finding is consistent with our priors that the program would create a sorting of industries across space based on what industries could receive the tax credit, as has been shown in the existing literature (Hanson and Rohlin, ; Patrick, ).…”

“…Other researchers have used establishment‐level data to determine the impact of state tax policy on business location (Gabe and Bell, ; Rathelot and Sillard, ; Duranton, Gobillon, and Overman, ; Bruce and Deskins, ; Rohlin, Rosenthal, and Ross, ). Patrick () created an index to capture the degree to which state constitutions are constructed in a manner that allows state governments to offer nontax incentives to attract new businesses…”

“…Patrick () looked at the impact of capital subsidies, versus a tax credit. Using a measure of the subsidy amount, she finds that the effect of the capital subsidies varied across industries in the expected manner based on the predictions of Hanson and Rohlin ().…”

“…One explanation for the discrepancy regarding the effect of place‐based programs on business location decisions is that there are heterogenous effects of policies across different types of industries (Hanson and Rohlin, ; Patrick, ). In this paper, we use the New Markets Tax Credit (NMTC) to examine how government policy can cause a sorting of business activity across industries.…”

Identifying the Local Economic Development Effects of Million Dollar Facilities

“…In this view, the induced establishment generates positive spillovers that outweigh the costs (to the government and/or residents) of the incentives. A virtuous cycle of economic development ensues, which is characterized by higher wages, new establishments, increased employment, increased revenues, better public services, and/or lower tax rates (Eisinger ; Patrick ).…”