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.
By examining recent trends and policy failures, Cato aims to foster a deeper understanding of how to reform these practices for more transparent and fiscally responsible governance. ITR Foundation published Cato’s study, with their permission, broken down into a series of articles. The full study is available on Cato’s website.
Cato Institute Policy Analysis No. 980
By Scott Lincicome, Marc Joffe, and Krit Chanwong
As discussed in the section on incentives’ costs, 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.
A tax expenditure is any reduction in government revenue attributable to a special provision of the tax code.43 This broad category includes such “as-of-right” exclusions as the mortgage interest deduction. This type of provision can be used by a wide array of taxpayers and normally lies outside the definition of a corporate tax incentive.44
The Governmental Accounting Standards Board’s (GASB) Statement 77 requires transparency for a narrower category, tax abatements, which are revenue losses “resulting from an agreement between a government and an individual or entity in which the government promises to forgo tax revenues and the individual or entity promises to subsequently take a specific action that contributes to economic development or otherwise benefits the government or its citizens.”45
GASB 77, which took effect in 2017, has increased tax incentive transparency, but the statement and its implementation have several limitations. First, it does not require governments to report a lifetime revenue loss from any given abatement, but only the amount lost in the fiscal year covered by the relevant financial statement. Second, local governments in several states are not required to implement GASB reporting standards and generally do not do so.
While the apparent benefits of corporate subsidies are seen and tangible, their costs are less obvious. Nevertheless, they are significant and widespread.
Finally, even among GASB-compliant entities, tax abatement reporting has not been consistent since Statement 77 went into effect. Analysis by Good Jobs First finds uneven local government tax abatement reporting across states, with many failing to report “passive” revenue losses, which occur when a tax abatement implemented by one jurisdiction affects overlapping entities (e.g., counties, municipalities, school districts, and special districts that all tax a given area).46
Another promising data source is tax incentive reports published by most states and some local governments. A Volcker Alliance analysis found that 42 states issued such reports for the 2019 fiscal year.47 The Institute on Taxation and Economic Policy provides a set of links to more recent tax expenditure reports produced by most states.48
However, tax expenditure reports vary widely across states and suffer from important limitations. Consider Ohio, which was cited by the Volcker Alliance for having an especially high level of detail in its reporting. Despite this level of transparency and detail, gathering data on tax incentives for Ohio presents challenges.
Ohio’s latest tax expenditure report shows revenue losses for fiscal years 2022–2025 across 154 state tax measures. In FY 2023, aggregate revenue losses totaled $10.5 billion, with most of the tax expenditures stemming from as-of-right provisions such as a blanket sales tax exemption for tangible property intended for use in manufacturing.49
The Ohio report includes several true corporate tax incentives, such as job creation and job retention tax credits. The report does not show which companies benefited from these credits, but lists of beneficiaries can be found in the Appendix to the Ohio Department of Development’s annual report.50 Unfortunately, these lists do not show the amount credited to each participating employer. Finally, the revenue losses shown in the state’s tax expenditure report do not reconcile with totals shown in the tax abatements note to the state’s 2023 Annual Comprehensive Financial Report (ACFR).51
Delaware’s tax incentive reporting is less developed than Ohio’s and thus presents further challenges. The state’s most recent “Tax Preference” report covers 54 tax expenditures over two fiscal years, but for about half of these, the total revenue loss is shown as $0, Negligible, Unknown, N/A, or not disclosable due to taxpayer privacy laws.52 Delaware’s latest ACFR shows only two tax abatements totaling $8 million, and reported amounts do not correspond to those shown in the Tax Preference report.53 Other state reports present similar transparency problems.
Finally, GASB 77 and tax expenditure reports exclude important categories of incentives, such as grants, loans, and subsidized infrastructure.
Lincicome, Scott, Marc Joffe, and Krit Chanwong. “Reforming State and Local Economic Development Subsidies,” Policy Analysis no. 980, Cato Institute, Washington, DC, September 19, 2024.
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