The Effect of Tax Incentives on Local Private Investments and Entrepreneurship: Evidence from the Tax Cuts and Jobs Act of 2017
75 Pages Posted: 25 Apr 2022 Last revised: 1 Dec 2022
Date Written: July 15, 2021
This paper studies the impact of a place-based tax credit policy, the Opportunity Zone program created under the Tax Cuts and Jobs Act of 2017, on local private investments and entrepreneurship. Using a difference-in-differences approach and comparing census tracts designated as Opportunity Zones and other eligible but non-designated tracts, I find that the policy has drawn significantly more private investments to economically distressed areas. Surprisingly, however, these private investments have led to decreases in local new business registration. The decrease in entrepreneurship was mainly in the non-tradable sector, which is more sensitive to local conditions than the tradable or construction sector. Further robustness tests suggest that the above results are causal. More private investments went to existing and older firms in Opportunity Zones, discouraging potential entrepreneurs from competing with the better-financed firms locally and reducing local business dynamism.
Keywords: Entrepreneurship, Investor Tax Credits, Private Investment, Opportunity Zones, TCJA, Access to Finance
JEL Classification: H25; L26; G24; R51
Suggested Citation: Suggested Citation