Business Incentive Policy Recommendations and Conclusion

Ideally, state and local governments should eliminate all corporate tax incentives and subsidies, given their economic, political, and ethical drawbacks. Government is least disruptive to economic activity when it limits spending to essential state activities, avoids intervening in private, commercial markets, and finances its operations through low, broad-based, easily understood taxes.

So Why Do Business Incentives Persist?

The corporate incentives game creates a subsidies arms race among states and localities—one that is difficult to stop without an agreement among policymakers. Despite the well-documented, widely shared concerns associated with corporate incentives, their use has persisted and even increased in the early 2020s. One reason is political: Voters tend to support incentives, and elected officials in different jurisdictions compete to win votes by attracting businesses. A second factor is that courts have been deferential to what elected officials define as “public purpose.” This allows legislators to circumvent anti-aid or gift clauses in state constitutions.

Business Incentives’ Lack of Transparency

Measuring the budgetary impact of corporate subsidies is complicated by a lack of transparency. There is no single comprehensive source that covers all spending and forgone tax revenue related to corporate incentives.

Efforts to improve transparency in this area have traditionally focused on tax expenditures and tax abatements; loans and outright subsidies have received less attention. Therefore, it is useful to define these terms before exploring the available resources.

The Economic Costs of State and Local Business Incentives

While the apparent benefits of corporate subsidies are seen and tangible, often taking the form of a new office building or manufacturing plant, the economic costs are less obvious. Nevertheless, these costs are significant and widespread.

The Purported Benefits of Business Incentives

Advocates of corporate incentives routinely allege that the measures generate significant benefits for state and local governments and their communities, but these claims are questionable.

In fact, state and local subsidies often pay companies for investments they would have made regardless of whether a business incentive was offered. Notably, research shows that very few business incentives are directly responsible for causing the investment at issue.

The Recent Increase in State Subsidies for Electric Vehicles and Semiconductors

State and local governments often offer economic development subsidies to attract businesses, but these incentives come with significant costs and questionable benefits. Our friends at the Cato Institute have published an excellent, in-depth study that breaks down the complexities of business incentives, exploring their impact on economic growth, budgetary costs, and the effectiveness of such subsidies in driving business decisions. […]

What Are Business Incentives and Their Budgetary Costs?

State and municipal business subsidies can induce companies to invest locally but are often ineffective and costly, especially when compared to alternative policies proven to encourage investment in a more efficient and equitable way. Recently, states have offered companies such as semiconductor and electric vehicle producers especially large incentives, usually linked to Biden-era industrial policy.