Targeted Tax Incentives
Download articleIn addition to cuts in overall state-level business taxes, state and local governments frequently use targeted tax incentives, which, as the name implies, are tax breaks designed to entice specific businesses to relocate to a region. For instance, in 2005, Texas state officials offered Samsung more than $200 million in property tax rebates to get the company to locate near Austin. Currently, several Southwestern states are offering similar incentives to Facebook as the corporation looks to open new data centers. Although it’s nearly impossible to keep track of the total amount spent nationwide on these incentives, a 2012 New York Times report estimated this figure at more than $80 billion per year.
Politicians hope that offering these incentives to businesses will sway their decisions about where to locate, thus providing jobs and other benefits for their respective states. If tax incentives do actually influence the location decision of a firm, then they create obvious and tangible benefits for the communities in which they locate. But most evidence suggests that, most of the time, targeted tax incentives do not sway location decisions; one report from the Institute on Taxation and Economic Policy concluded that "as many as 9 out of 10 hiring and investment decisions subsidized with tax incentives would have occurred even if the incentive did not exist." This fact implies that states are essentially giving "free money" to large corporations.
Along these lines, many have likened these policies to subsidies or corporate welfare programs rather than to traditional tax cuts. Targeted tax incentives "do not improve conditions for business development but instead seek out specific businesses and cut them deals so they will develop," argues Scott Drenkard of the Tax Foundation.
Even if tax incentives were widely effective in persuading firms to locate in certain communities, they would still be hard to justify economically. Targeted tax incentives are a clear example of a zero-sum game — one community's gain is an equally large total loss for everywhere else. In this case, the jobs and wages a community receives due to the incentive are balanced out by the fact that these jobs are taken from other locations in which businesses would have located instead.
Additionally, the positive benefits enjoyed by these certain communities may be only temporary. Companies receiving tax breaks to move to a municipality are always free to relocate or shut down when economic conditions change. During the Great Recession, General Motors closed over 50 of its properties for which it had received state and local tax breaks to build. Economist Jeffrey Dorfman of the University of Georgia has noted that in such instances, communities are often made worse off than they would have been if the company had never located there to begin with, since they are still stuck paying for now-unneeded infrastructure built to accommodate these businesses.
For these reasons, the use of targeted tax incentives is overwhelmingly opposed by economists and even groups such as the Tax Foundation that advocate for lower tax rates across the board. Economists at the Minneapolis Fed have even called for a federal ban on state and local tax incentives, arguing that this would save taxpayer money without inflicting overall economic harm, since businesses would still have to locate somewhere.
Despite the economic inefficiency of targeted tax incentives, they will likely remain popular policy. Nevertheless, state governments would probably see much better results from creating a better climate for all businesses than from giving handouts to specific ones.
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