You Don't Always Get What You Want: The Effect of Financial Incentives on State Fiscal Health

Abstract

Governments frequently use financial incentives to encourage the creation, expansion, or relocation of businesses within their borders. Research on financial incentives gives little clarity as to what impact these incentives may have on governments. While incentives may draw in more economic growth, they also pull resources from government coffers, and they may commit governments to future funding for public services that benefit the incentivized businesses. The authors use a panel of 32 states and data from 1990 to 2015 to understand how incentives affect states’ fiscal health. They find that after controlling for the governmental, political, economic, and demographic characteristics of states, incentives draw resources away from states. Ultimately, the results show that financial incentives negatively affect the overall fiscal health of states.

The Diffusion of Merit Aid Programs Across State Lines

“…Beginning with the competition mechanism, we argue that states compete for the human capital that their residents, particularly their educated residents, provide. Therefore, to gain votes and be reelected, politicians must give the appearance that they are working to solve constituent problems (Kim, Shon, & McDonald, 2021;Young, Wiley, & Searing, 2020), and one way of accomplishing this is the expansion of the region's economy (see McDonald, Decker, & Johnson, 2021;Prillaman & Meier, 2014). However, the desire for economic expansion is great, leading states to compete against each other to expand within their borders (Berry & Baybeck, 2005;Boehmke & Witmer, 2004;Decker, 2021).…”

“…For a more detailed discussion on the contribution of fiscal health to state policy and the complications of measuring fiscal health, see Maher and Nollenberger (2009), Maher, Stallman, Deller, and Park (2017), McDonald, Decker, and Johnson (2021), McDonald (2015, 2018), and Foged (2021.…”

Politics, Competence, and Performance: Evidence from the US State Budget Agencies

“…There seems to be, however, no consensus on the best measures of fiscal performance. Recent studies have converged to use multiple measures of fiscal performance (e.g., Jimenez 2019; Jimenez 2020; McDonald, Decker, and Johnson 2020). In addition, many of the financial performance indicators are built upon data from government Comprehensive Annual Financial Reports (CAFRs) (e.g., Jimenez 2019; Jimenez 2020).…”

Does the Stringency of State Tax and Expenditure Limitations Discourage Political Manipulation in Fiscal Reserves?

“…However, the literature on TELs has not examined the effect of the limits on the politics, especially whether TELs and their stringency can remove the political manipulation. So far, much of the research on TELs has focused on whether TELs matter in outcomes such as the levels of revenue and spending as well as economic growth (e.g., Bae, Moon, and Jung 2012; McDonald et al 2020). Thus, our study broadens the scope of TEL research by examining the impact of TELs on opportunistic saving behavior.…”