The Failure of Economic Development Incentives

With budget season upon us, politicians are scrambling for new revenue sources or programs to cut.  "The Failures of Economic Development Incentives," a 2004 report by Alan Peters and Peter Fisher, explains why the state could easily cut $750 million in subsidies and tax incentives without hurting the economy.

The academic article reviews 30 years of political experimentation and hundreds of studies, concluding economic development incentives actually hurt a state's economy.

Specifically they found the incentives fail to spur economic growth, and targeted incentives fail to provide opportunities to poorer people.

In most states, some portion of a state’s economic development funding will be targeted at distressed areas; some (small) portion of that funding may actually be effective in inducing investment and jobs in those areas; some fraction, and probably not a large one, of those induced jobs (if there are any) will actually go to residents of that area; and some of those newly employed residents may actually be the poor or unemployed we were trying to help. And even this doubtful level of policy effectiveness may be difficult to sustain in the long run.

And if the state funds locally targeted incentives, the state is merely spending money to move taxpaying firms from one place to another, but now the entire incentive cost is a state loss. And these fiscal losses are not trivial; the cost per job could be massive.

They go on to explain that tax credits - compared to transportation, labor, other costs, and the state's overall business climate - are not a driving factor in location decisions. As a result lawmakers give away tax revenue to firms that would like to locate in the state anyway.

CF has written extensively about the failure of economic development ("corporate welfare") policies in Pennsylvania.