Tax Subsidy Information and Local Economic Effects

Abstract

We examine if the effectiveness of business tax subsidies varies based on whether subsidies are subject to state disclosure laws. State and local business incentives for investment and employment have tripled in size over the past thirty years (Bartik, 2019), now amounting to over 40 percent of total state corporate tax revenues (Slattery and Zidar, 2020). However, transparency problems inhibit clear assessments of whether subsidies achieve their intended outcomes. We study the role of subsidy disclosure laws. We examine both internal disclosure laws, which mandate subsidy reporting by the granting state agency to other state oversight agencies, and external disclosure laws, which mandate reporting to the public. We find positive effects of subsidies on local employment when subsidies are subject to internal disclosure laws; by implementing such regimes, governments could forego 1.2-1.7 subsequent subsidies per county, saving \$419.0-\$593.5 million in aggregate. In contrast, we observe little effect of external disclosure, which we show is due to governments either substituting to other incentive grants or posting stale information that impedes public monitoring. We contribute to the government disclosure literature by demonstrating the real employment effects of internal government disclosures, and we provide policy-relevant evidence about the conditions under which external disclosure regimes facilitate public monitoring. The evidence directly informs the increasing number of states implementing subsidy disclosure regimes.

Keywords: Business taxes, Subsidies, Employment, Local information

JEL Classification: G38, H25, M40, M48