Variation in the Heartland: Explaining the Use of Economic Development Incentives in Three Great Lakes States

We identify the factors correlated with the use of economic development incentives after the Great Recession of 2007–2009 to determine the presence of entrepreneurial development regimes. We utilize a unique dataset that combines information on incentives (tax increment financing districts and selected tax abatements and business assistance) with economic, fiscal, and political characteristics for all municipalities in the largest Metropolitan Statistical Areas of Illinois, Wisconsin, and Michigan. These three states bordering Lake Michigan share similar histories and settings, thus targeting the research focus on the key attributes of interest. Our empirical results demonstrate substantial dissimilarity between incentive types and across states, most likely due to policy structures and reforms at the state level that encourage different municipal development regimes. Whereas municipalities, particularly larger ones, continue to use tax abatements, exemptions, and credits to pursue employment growth, the municipalities gravitating toward tax increment financing tend to be suburbs with low unemployment rates and relatively highly educated residents, and not places with greater employment density or manufacturing employment.

Chasing Disparity: Economic Development Incentives and Income Inequality in the U.S. States

Political scientists and policy scholars have traditionally looked at the role of welfare and tax policies in shaping income inequality. Less attention has been paid to the key policy area of economic development. But states spend billions on economic development incentives each year to encourage firms to locate in their state. The few studies that have examined the impact of economic development policy on inequality have found mixed results, and have not considered who shapes and benefits from economic development policy when identifying possible causal mechanisms. I argue that increased incentive spending leads to increased inequality through either a market conditioning effect (incentives disproportionately boost the incomes of top earners prior to taxes) or a redistributive effect (incentives allow wealthy firms, investors, and employees to keep income that would otherwise be taxed and transferred). These mechanisms are tested using data on incentive spending and inequality across the 50 states from 1999 to 2014. The findings demonstrate that incentives increase income inequality via a redistributive effect only. This effect, though, is relatively large, long-lasting, and robust to different measures of incentive spending. Despite using economic development incentives to try to generate greater prosperity, state governments may be inadvertently exacerbating inequality.

Striking a Balance: A National Assessment of Economic Development Incentives

The use of incentive packages has intensified as local governments compete for new plants and corporate relocations and as private firms increasingly demand a deal. While incentives promise jobs and tax revenue, scholars and practitioners criticize their high cost and limited accountability. Through a comparison of matched establishments, this article explores how governmental incentive-granting strategy impacts incentive performance. We examine the overall impact of incentives and whether incentives granted to smaller firms perform better. Using economic development budget data, we also assess the state’s overall approach to economic development to determine which strategies are prioritized through funding. By showing that incentivized firms fail to create more jobs than matched controls, our analysis casts doubt on claims that “but for” incentives job creation would not occur. Still, our findings suggest that states are smarter in their incentive use when they strike a balance between recruiting industry and supporting “homegrown” businesses and technology.

Targeted state economic development incentives and entrepreneurship

Purpose The purpose of this paper is to examine the relationship between state economic development incentives programs and entrepreneurial activity. Design/methodology/approach The authors use panel data and a fixed-effects model to examine the determinants of five measures of entrepreneurial activity. To measure state economic development incentives programs, they use a new and substantially improved data set from Bartik (2017). They also include a measure for economic freedom, the Fraser Institute’s Economic Freedom of North America index. Findings The authors find a robustly negative relationship between development incentives and patent activity. They find some evidence that incentives are negatively associated with small business establishments (<10 employees) as a percentage of total establishments but positively associated with the large business establishment (>500 employees) share. They also find evidence of a positive relationship between economic freedom and both patent activity and net business formation. Research limitations/implications The results imply that economic development incentive programs are unlikely to increase entrepreneurial activity and may decrease it. They also imply increased economic freedom (lower taxes, lower spending, and lower governmental restrictions on labor markets) may increase entrepreneurial activity. Originality/value To the authors’ knowledge, this paper provides the first examination of the relationship between development incentives and entrepreneurial activity that utilizes Bartik (2017), a new vastly improved data set of state economic development incentive programs. The paper also contributes to the literature on the relationship between economic freedom and entrepreneurial activity.