Job Creation Tax Credits, Fiscal Foresight, and Job Growth: Evidence from U.S. States

76 Pages Posted: 22 Mar 2016

See all articles by Robert S. Chirinko

Robert S. Chirinko

University of Illinois at Chicago, Department of Finance; CESifo (Center for Economic Studies and Ifo Institute)

Daniel J. Wilson

Federal Reserve Bank of San Francisco

Multiple version iconThere are 2 versions of this paper

Date Written: November 2016

Abstract

This paper studies fiscal foresight -- alterations of current behavior by forward-looking agents in anticipation of future policy changes – using variation in state job creation tax credits (JCTCs). Nearly half of the U.S. states enacted JCTCs between 1990 and 2007, and their unique experiences provide a rich source of information for assessing the quantitative importance of fiscal foresight. We investigate whether JCTCs affect employment growth before, at, and after the time they go into effect. A theoretical model identifies three key conditions necessary for fiscal foresight, captures the effects of the rolling base feature of JCTCs, and generates several empirical predictions. We evaluate these predictions in a difference-in-difference regression framework applied to monthly panel data on employment, the JCTC effective and legislative dates, and various controls. Failing to account for the distorting effects of fiscal foresight can result in upwardly biased estimates of the impact of the JCTC fiscal policy by as much as 34%. We also find that the cumulative effect of the JCTCs is positive, but it takes several years for the full effect to be realized. The cost per job created is approximately $18,000, which is low relative to cost estimates of recent federal fiscal programs. This figure implies a fiscal multiplier on JCTC tax expenditures of about 1.66.

Keywords: fiscal foresight, job creation tax credits, state business tax incentives, implementation lags, fiscal policy

JEL Classification: E620, E240, H250, H710

Suggested Citation

Chirinko, Robert S. and Wilson, Daniel J., Job Creation Tax Credits, Fiscal Foresight, and Job Growth: Evidence from U.S. States (November 2016). CESifo Working Paper Series No. 5771. Available at SSRN: https://ssrn.com/abstract=2752860

Robert S. Chirinko (Contact Author)

University of Illinois at Chicago, Department of Finance ( email )

2431 University Hall (UH)
601 S. Morgan Street
Chicago, IL 60607-7124
United States

HOME PAGE: http://tigger.uic.edu/~chirinko/

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

HOME PAGE: http://www.CESifo.de

Daniel J. Wilson

Federal Reserve Bank of San Francisco ( email )

101 Market Street
Mail Stop 1130
San Francisco, CA 94105
United States

HOME PAGE: http://www.frbsf.org/economics/economists/dwilson.html

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