Growing Pennsylvania’s Economy: Tax Cuts vs. Economic Development Programs


As the competition between states for economic growth intensifies, an increasing amount of attention is being evoted to what state governments can—or should—do to help create and attract jobs and industry. Toward that end, state economic development agencies offer a wide array of taxpayer-funded incentives to individual businesses in the hope that those firms will produce enough new jobs and investment to “pay for” the government’s largesse. Officials touting such initiatives claim that they do—and that states must be ready to provide economic aid to companies or risk losing them to other states that are willing to be more generous.

But do state subsidies to businesses really produce high quality jobs and a return on taxpayers’ investments? A number of economists who have analyzed the results of such deals argue that in most cases, state aid does little more than increase the profits of private businesses at the expense of taxpayers—without creating many new jobs. They believe that the best way for a state to promote economic development is to concentrate on providing a vibrant, low-tax economic climate for all businesses—large and small.

Over the past several years, Pennsylvania has attempted to improve its economic performance, both by reforming its state-sponsored economic development programs and by cutting business taxes and regulation. In the 1995-96 Governor’s Executive Budget, the newly elected Ridge Administration outlined its strategy for doing so:

The design and delivery of economic development programs are important factors in a state’s ability to attract and retain jobs. Pennsylvania’s experience, however, demonstrates that even successful economic development programs cannot overcome a tax policy that is anti-business and anti-growth. Without significant changes to the way we direct our economic development efforts, Pennsylvania cannot expect to reach its economic potential.

The following paper examines the arguments about state economic development strategies. Specifically, it compares the effectiveness of taxpayer-funded economic development programs with that of tax policies aimed at allowing the private sector to create growth. It also examines the changes in Pennsylvania’s economic development efforts and surveys its resulting economic performance. Finally, it suggests some guidelines for policymakers evaluating state-funded economic development incentive programs.