Economic Development Tax Incentives: A Review of the Perverse, Ineffective, and Unintended Consequences

Abstract

Did you know that some lucky companies have agreements with state and local governments to pay less in taxes than their competitors? These deals are called “economic development tax incentives,” and they are all justified in the name of creating jobs. But do they? Is it the job of the government to decide which businesses succeed and which ones fail? How do these deals affect political contributions? This chapter reviews the consequences of such targeted tax incentives, showing how these deals hurt taxpayers and providing policy recommendations that would treat all businesses equally. Key takeaways: (1) Governments sometimes take taxpayers’ money and give it to a few favored corporations. (2) If states are going to use targeted economic development tax incentives, disclosing their costs would improve transparency.

Keywords: taxation, tax policy, government favoritism, cronyism, tax incentives

JEL Classification: H2, H7, H71