More devilish details about educational investments versus business tax cuts

A previous post responded to a question from an early childhood and education program advocate, who is trying to convince state legislators and their staff that educational investments compare favorably with business tax cuts. Their question was: “Do we have the evidence to say that early childhood education and school performance is more important to state economic development than the business tax?” My answer in the previous post was that high-quality early childhood programs had evidence of economic development benefits, per dollar, of four to six times the benefits per dollar of across-the-board business tax cuts.

However, the answer is more complicated if we consider other types of education spending and business tax cuts.

High-quality early childhood programs are among the most cost-effective educational investments. Other investments in education may also have benefits exceeding costs, such as lower class size in early elementary school, or investments in better teacher quality. But in general, most other spending on K-12 education will not have as high a benefit-cost ratio as is true for early childhood programs.

Furthermore, well-designed business tax incentives can be more cost-effective than across-the-board business tax cuts. A well-designed business tax incentive can yield state economic development benefits of about $3 per dollar invested, which is comparable to the returns to high-quality early childhood programs. Business incentives that provide high-quality services to businesses, such as customized job training and manufacturing extension services, can have even higher ratios of benefits to costs.

High-quality early childhood programs and well-designed business incentives complement each other. Early childhood programs help develop a high-quality labor supply for a state, and well-designed business incentives help improve the level and quality of labor demand in the state.

I think advocates for early childhood programs and other well-designed educational investments should be willing to advocate for higher household taxes to fund an economic development strategy that includes these programs. Households should be willing to pay higher taxes for programs that have good evidence of boosting local economic prosperity. This includes targeted investments in both high-quality educational programs and targeted investments in high-quality business incentives. Such targeted investments will be cheaper and more effective than simply making across-the-board changes in spending levels and tax rates.

If the devil is in the details, let’s get the details right. Let’s demand for all proposed economic development policies, both for educational programs and business taxes, that they be equally accountable for showing rigorous evidence of cost-effectiveness.

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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