Are business tax incentives a zero sum game regardless of which local areas offer such incentives?

I argued in a previous post that the national benefits of business tax incentives were less than 20% of the state benefits of business tax incentives. But is this true regardless of which local area is offering these tax incentives? The answer is No. Business tax incentives have greater national benefits if offered in areas that are economically distressed, and smaller national benefits if offered in economically booming areas.

Even if business incentives do not boost the number of national jobs, they may provide significant national social and economic benefits if jobs are redistributed towards economically distressed local areas. Business incentives can do so if such incentives are provided for business location and expansion in economically distressed areas, but not provided in economically booming areas.  I present the evidence for this argument as part of chapter 10 of Investing in Kids.

Redistributing jobs to economically distressed areas can offer net national benefits for several reasons. First, in more distressed areas, the local unemployed are more in need of jobs on average than is true for booming areas. Therefore, job growth is more highly valued in distressed areas than in booming areas.

Second, in more distressed areas, compared to booming areas, there will tend to be greater excess capacity in local infrastructure and public services. Therefore, there will be some fiscal benefits of redistributing jobs to distressed areas. Another way of putting this is that redistributing jobs to distressed areas better preserves existing infrastructure and minimizes the need for building expensive new infrastructure.

Third, there is some evidence that redistributing jobs to distressed areas, compared to redistributing jobs to booming areas, will reduce national inflationary pressures. If booming areas aggressively offer business incentives, the resulting job growth in these booming areas is more likely to bid up local wages and prices, which will eventually affect national inflation trends.

Fourth, as outlined in a previous post, the labor market benefits of creating jobs in already booming areas may be modest, as more of the jobs will go to in-migrants.  The unemployed are less likely to be helped.

These differences in the national benefits of business tax incentives, according to which area offers such incentives, is relevant to setting federal policy towards business incentives. I consider this issue in a future blog post.

How does this contrast with early childhood programs? Early childhood programs contribute to national economic productivity and provide net social benefits regardless of which local area provides these programs. They do so because early childhood programs directly target the productivity of labor, by intervening early.  Business tax incentives only provide net national benefits if provided in economically distressed areas.  Only if the jobs are redistributed to distressed areas, where such jobs can lead to better use of excess labor ,and better use of excess capacity in infrastructure, do business tax incentives increase national productivity.

About timbartik

Tim Bartik is a senior economist at the Upjohn Institute for Employment Research, a non-profit and non-partisan research organization in Kalamazoo, Michigan. His research specializes in state and local economic development policies and local labor markets.
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2 Responses to Are business tax incentives a zero sum game regardless of which local areas offer such incentives?

  1. Pingback: Federal policy towards business incentives | investinginkids

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