Economists Gauge Effectiveness Of Targeted Tax Incentives

Over the last twenty years, North Carolina has repeatedly lowered its corporate tax rate and used incentives to lure new companies like Dell, FedEx, and Caterpillar. Just last year, more than $20 million in incentives was offered to Microsoft alone. But new research shows that packages targeting individual companies may not actually spur broader economic growth. 

Columbia economist Cailin Slattery co-authored the national study. She tells WFDD's David Ford that while targeted tax breaks can be effective tools to attract new firms or retain existing ones, gauging their effectiveness is tricky.

Interview Highlights

On verifying the success rate for tax incentives:

It's tough because there hasn't been any comprehensive data sets of not only the firms' specific tax incentives, but just at the state and local level, how much they're spending on tax credits and budget programs. I mean, the states have very good data on where they're getting revenue from. They should evaluate after they give a firm specific subsidy on what actually the effect was and what type of workers the firm is hiring. And I think that would go a long way if we're going to learn about which programs are the most effective. Also, you don't know what's called the “but for,” so, you don't know what the company would have done without the incentive. When I talked to the state economic development professionals, they say they try and do as much as they can to figure out, you know, is this credible? A lot of times, a firm is trying to open up a new plant in your state. And they're saying, 'Oh, we have all these great offers from other states.' And so, then what the state should and can do is say, ‘OK, well, let's see some documentation of what those offers are.' 

On the primary beneficiaries of targeted tax breaks:

It's the largest firms that are receiving these incentives, and they're not only large in terms of how many employees they are promising, and in the establishment they're going to open in the state or city, they're larger in terms of profits and revenues and market share. So, you know, it's these large multinational firms that are receiving these incentives. And although they are creating maybe a thousand or two thousand jobs at the establishment, they're only a very small portion of total jobs created in the country every year. About a fourth of total state and local economic development spending is going to very, very, very few firms.

On contracting incentives:

There is a way to structure these incentive deals to make sure that they're working for you. You write it so that you only give the money when the jobs are materialized, and the investment actually happens. But still, because states and local governments are so focused on the spillovers — the indirect job creation — there's no way to contract on indirect job creation, because that's not something that the firm itself is doing. That's something that you're expecting to happen in the local economy. You're expecting that once I get Dell, for example, to locate here, then either there's going to be startups opening from Dell spinoffs or there's going to be, you know, more people going to coffee shops and then there's going to be more baristas hired, things like that. And, you know, that's not Dell's responsibility to make that happen.

A summary of the new study can be found in the January 6, 2020, Wall Street Journal article: Economists Question the Benefits of Targeted Tax Breaks.

EDITOR'S NOTE: This transcript was lightly edited for clarity.