The Political Economy of States' Job-Creation Business Incentives

Abstract

Nearly every state government in the country uses tax credits, subsidized loans, and other instruments to induce private investors to expand or construct new facilities within its borders. A theoretical analysis of such policies, in the context of a realistic picture of the contemporary structure of American industry, indicates no reason to expect that tax or related cost-side incentives will—by themselves—generate new investment (if any segment of the business community is likely to be responsive, it would be those firms paying the lowest wages and employing the fewest workers). A review of the empirical literature strongly supports the argument against such incentives. Finally, a political-economical analysis of business incentive policies leads the authors to conclude that these costly subsidies constitute a form of “welfare grant” to the business sector, especially in declining areas of the country.