The Determinants of Tax-Based Incentives: An Empirical Analysis of State Governments

Abstract

To determine why state governments often use tax-based incentives, this study focuses on five major tax-based incentives: job creation tax credits, investment tax credits, R&D credits, property tax abatements, and customized job training subsidies. The statistical results indicate that a state government’s prevailing political ideology influences the choice of economic development activities. Accordingly, a more liberal state is less likely to use property tax abatements and customized job-training subsidies, and more likely to use job creation tax credits and R&D tax credits. Further, competition does not operate to trigger tax-based incentives. State economic conditions are not significantly related to the use of incentives. This result could imply the prevalence of political factors in the use of incentives.

Keywords:

• Determinants
• economic development policies
• political ideology
• state governments
• tax-based incentives

Notes

1 This is “an aggregate measure that accounts for partisan affiliation and power in the governor and state legislature” (Leiser, 2017, p. 345).

2 “Present value calculated using 12% discount rate for new facility begun in 2015 and operated at same scale for 20 years” (Bartik, 2017, p. 47).

Additional information

Notes on contributors

Hakyeon Lee

Hakyeon Lee is a research fellow in Gyeonggi Research Institute. He received doctorate degree from the Martin School of Public policy and Administration at the University of Kentucky. His research interests include tax incentives, state and local government financial management, and municipal securities.

J. S. Butler

J.S. Butler is a professor in the Martin School of Public Policy and Administration at the University of Kentucky. He is an econometrician working in economics, public policy, and education. His research has appeared in journals including Review of Economics and Statistics, Econometrica, Journal of Econometrics, Teaching of Psychology, etc