State policymakers are constantly looking for ways to improve their local economies, and many rely on giving tax breaks to big businesses so that they can pump money into the community. However, results from a recent study suggest that this strategy doesn’t really work at all.
Researchers from North Carolina State University looked at the corporate tax incentives and other associated data for 32 states from 1990 to 2015 to determine how beneficial they were for everyone involved. They found that the states involved suffered negative repercussions a vast majority of the time.
"We found that, in almost all instances, these corporate tax incentives cost states millions of dollars - if not more - and the returns were minimal. In fact, the combination of costly tax incentives and limited returns ultimately left states in worse financial condition than they were to begin with,” said study corresponding author Bruce McDonald.
Most incentives backfire on states
The researchers say they focused on just 32 states because they represented 90 percent of all state and local tax incentives nationally.
Out of all the corporate tax incentives they researched, the team found that job creation tax credits and job training grants were the only ones that gave some benefit to the states. McDonald notes that these particular incentives only worked because tax revenue related to new jobs and underemployed consumers finding higher-paying work were able to offset the total cost of the incentives.
However, the remaining incentives ended up costing the states more than what they paid out. The researchers hope their findings may spur lawmakers to reconsider how these incentives are doled out in the future.
"The takeaway message here is that maybe states shouldn't be offering these tax incentives. Or, at the very least, states need to examine their assumptions about the impact these incentives actually have, with the exception of incentives explicitly tied to job creation and training," McDonald said.
The full study has been published in the journal Public Administration Review.