PART I: WHAT ARE INCENTIVES?
PART II: WHY ALL THE INCENTIVES?
PART III: HOW TO TALLY THE IMPACTS?
Decades of research has shown that the economic impacts of tax incentives are mixed at best, and emerging research is showing that the social costs of tax incentives can be enormous. So then begs the question, why do it: Why risk abating taxes on stressed budgets to attract or retain a firm that already made up its mind to stay? Why risk subsidizing with tax dollars a project that may or may not deliver the promised benefits - instead of investing in something that generates sure, if longer-to-materialize, returns, like human capital.
These are not meant to be rhetorical questions; they are important things to consider when deciding to approve an incentive and determining how the incentive agreement needs to be structured. how long to tax a property at, say, half value for, or what to do if the company falls short on creating jobs or generates some other kinds of harm on the surrounding communities. PART III of this "trilogy" will suggest outcomes to consider.
So why incentives? The answer you're likely to hear from experts is "it's political (rationality)." It hardly matters that academic research doesn't support signing away this much tax revenues, if it makes sense for the decision-maker from his/her perspective to do it, and particularly when the analysis is ambiguous (it's generally difficult in social sciences and policy studies to isolate interventions for costs and benefits attribution). Only when deals fall apart spectacularly, like Foxconn in Wisconsin a few years ago, or when communities push back in a way that attract media attention (e.g., Queens, NY re: Amazon HQ2, East Baton Rouge, LA re: ExxonMobil, etc.) is there a strong enough reason to go against the prevailing currents at the individual, interactive, and institutional levels:
Individual - For the elected official, almost any deliberate action to improve things makes more sense to pursue than inaction. Signing a tax abatement agreement with a prominent firm carries a host of benefits. I cannot do justice here to this book by N. Jensen and E. Malevsky Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain. The authors argue that when "global competition for capital meets local politics," the result is personal drive to take credit for signs of economic growth, and pursuing economic growth strategies is a ready way to do it, regardless of whether the exact strategies are called for.
Interactive/social - Competitive dynamics, perceived or actual, permeate a decentralized governance system. Places compete, and sometimes quite openly, like those that bidded for the second headquarter of the e-commerce giant, Amazon.com. You almost never think of competition going the other way around (i.e., firms competing for places to locate), even though many incentives are competitively structured. Game theory suggests that power and information asymmetry can lead rational agents to make suboptimal rational choices in the absence of trust and coordination. The analogy of prisoner's dilemma is often applied, like in this piece by the Mercatus Institute. There has been a lot of research by political economists to address the problem at multiple levels. Some states are figuring out mutual or multilateral ceasefire options in hopes of ending these costly incentive wars.
Institutional/systemic - Arguably, deindustrialization of certain manufacturing cities, neoliberal restructuring, and the fervent pursuit of targeted, market-based strategies under the Clinton administration (i.e., all the special zones) left fertile soil for incentives to grow. As industries change, so do subsidy types. Nowadays, problematic ones proliferate, like sales tax rebate for data centers which eat up a lot of the grid and need few people to man, or property tax abatements for market-rate apartment buildings... imagination is the limit.
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