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Making Sense of Incentives: Taming Business Incentives to Promote Prosperity Upjohn Press Upjohn Research home page 10-8-2019 Making Sense of Incentives: Taming Business Incentives to Promote Prosperity Timothy J. Bartik W.E. Upjohn Institute for Employment Research, [email protected] Upjohn Author(s) ORCID Identifier: https://orcid.org/0000-0002-6238-8181 Follow this and additional works at: https://research.upjohn.org/up_press Part of the Labor Economics Commons Citation Bartik, Timothy J. 2019. Making Sense of Incentives: Taming Business Incentives to Promote Prosperity. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. https://doi.org/10.17848/ 9780880996693 This work is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 4.0 License. This title is brought to you by the Upjohn Institute. For more information, please contact [email protected]. Bartik “With this book, Tim Bartik has solidified his rank as the leading, trusted expert on economic development incentives and economic development broadly. The MAKING SENSE role of firm-based incentives has triggered passionate debate, and Bartik OF INCENTIVES responds with rigor, reason, and realism. I hope readers heed the call for needed reforms recommended in this timely book.” INCENTIVES: MAKING SENSE OF — Amy Liu, Vice President and Director, Taming Business Incentives Brookings Metropolitan Policy Program to Promote Prosperity “Economic development incentives are one of the biggest boondoggles of our time, draining away tens of billions of dollars of precious taxpayer dollars, with some states and cities offering as much as $7 billion to lure Amazon’s much- ballyhooed HQ2. No one understands the intricacies of economic development incentives—what works and what does not—and the broader field of economic development policy and strategy better than Tim Bartik. This book is an absolute must read for mayors, governors, economic developers, city-builders, CEOs and Prosperity to Promote Business Incentives Taming business executives, community activists, and all those concerned about the future of our cities and communities.” — Richard Florida, author of Rise of the Creative Class, and University Professor at the University of Toronto Timothy J. Bartik Cover Design: carol a.s. derks | derkstudio § § § “With this book, Tim Bartik has solidified his rank as the leading, trusted expert on economic development incentives and economic development broadly. The role of firm-based incentives has triggered passionate debate, and Bartik responds with rigor, reason, and realism. I hope readers heed the call for needed reforms recommended in this timely book.” —Amy Liu, vice president and director, Brookings Metropolitan Policy Program “Economic development incentives are one of the biggest boondoggles of our time, draining away tens of billions of dollars of precious taxpayer dollars, with some states and cities offering as much as $7 billion to lure Amazon’s much- ballyhooed HQ2. No one understands the intricacies of economic development incentives—what works and what does not—and the broader field of economic development policy and strategy better than Tim Bartik. This book is an absolute must read for mayors, governors, economic developers, city-builders, CEOs and business executives, community activists, and all those concerned about the future of our cities and communities.” —Richard Florida, author of The Rise of the Creative Class, and university professor at the University of Toronto “This book needed to be written and Tim Bartik needed to write it. Using clear, simple language and solid, empirical evidence he’s collected over decades of close observation, Bartik explains how state and local policymakers can make smart decisions about business incentives, bringing real benefits to their communities and avoiding the next Foxconn.” —Jared Bernstein served as chief economist to former Vice President Joe Biden, and is a senior fellow at the Center on Budget and Policy Priorities. “For just shy of three decades, Tim Bartik has been the country’s leading expert on the economics of state and local economic development strategies and programs. In language that is completely accessible to elected officials— not an equation in sight!—he rigorously explains here how to think about the benefits and costs of economic development incentives, optimize their structure, and evaluate their effectiveness. Every governor and state legislator should carve out three hours and read this book and then take its teachings to heart.” —Michael Mazerov, senior fellow, State Policy Project, Center on Budget and Policy Priorities § § § Making Sense of Incentives Making Sense of Incentives Taming Business Incentives to Promote Prosperity Timothy J. Bartik 2019 WEseries focus W.E. Upjohn Institute for Employment Research Kalamazoo, Michigan Library of Congress Cataloging-in-Publication Data Names: Bartik, Timothy J., author. Title: Making sense of incentives : taming business incentives to promote prosperity / Timothy J. Bartik. Description: Kalamazoo, Michigan : W.E. Upjohn Institute for Employment Research, 2019. | Series: WEfocus series | Includes bibliographical references and index. | Summary: “In evaluating incentives, everything depends on the details: how much in incentives it takes to truly cause a firm to locate or expand, the multiplier effects, the effects of jobs on employment rates, how jobs affect tax revenue versus public spending needs. Do benefits of incentives exceed costs? This depends on the details. This book is about those details. What magnitudes of incentive effects are plausible? How do benefits and costs vary with incentive designs? What advice can be given to evaluators? What is an ideal incentive policy? Answering these questions about incentives depends on a model of incentive effects, which this book provides” — Provided by publisher. Identifiers: LCCN 2019037192 (print) | LCCN 2019037193 (ebook) | ISBN 9780880996686 (paperback) | ISBN 9780880996693 (ebook) Subjects: LCSH: Industrial promotion—United States. | New jobs tax credit—United States. | Tax incentives—United States. | Industrial policy—United States. Classification: LCC HC110.I53 B37 2019 (print) | LCC HC110.I53 (ebook) | DCC 338.973—dc23 LC record available at https://lccn.loc.gov/2016037192 LC ebook record available at https://lccn.loc.gov/2019037193 © 2019 W.E. Upjohn Institute for Employment Research 300 S. Westnedge Avenue Kalamazoo, Michigan 49007-4686 The facts presented in this study and the observations and viewpoints expressed are the sole responsibility of the author. They do not necessarily represent positions of the W.E. Upjohn Institute for Employment Research. Cover design by Carol A.S. Derks. Index prepared by Diane Worden. Printed in the United States of America. Printed on recycled paper. Contents Acknowledgments xi Preface xiii 1 Why Incentives Are Tempting but Problematic 1 What We Talk about When We Talk about Incentives 1 Why Job Growth? 2 Why Targeted Incentives? Political Reasons 3 Why Targeted Incentives? Economic Rationale 4 Wasteful Incentives 5 Evaluating Incentives 6 2 A Description of Business Incentives 7 Incentive Trends 7 Incentives Today 8 How Large Are Incentives? 10 Which Firms Get Incentives? 12 Do Incentives Target Needy Areas? 13 Long-Term Incentives 14 Understanding Incentives 15 3 Multipliers and Leakages: How to Think about Incentives 17 Multipliers and Spillovers 18 Leakages and Negative Feedbacks 22 Key Factors Affecting Incentive Benefits 26 Differences from Usual Incentive Models 36 The Devil Is in the Details 37 4 Improving Incentives: What Can Policymakers Do? 39 The Baseline Model 39 Why Average Incentives Have Benefits Close to Costs 45 Average Incentives Are Dominated by Better Policies 47 Better Incentive Policies 54 5 Are My State’s Incentives Working? Practical Evaluation 61 Strategies for Incentive Programs Use a Model 61 Evaluating Job Creation Effects on Incented Firms: The Selection 63 Bias Challenge vii Overcoming Selection Bias 64 Surveys 77 Applying National Studies to State-Specific Incentives 81 What Should an Evaluator Do? 86 We Already Know Something about Ideal Policies 88 6 An Ideal State Incentive Program, Taking Account of 89 Economic and Political Realities Principles 89 An Ideal Program 91 Possible Questions, with Responses 93 The State Perspective vs. the National Perspective 98 7 The National Interest: What Should the Federal Government 101 Do about State and Local Incentives? Is State and Local Competition for Jobs a Zero-Sum Game? 102 Customized Business Services Can Make the National 104 Economic Pie Bigger Targeting Distressed Areas Can Make the National Economic 105 Pie Bigger and Help the Nonemployed Targeting High-Tech Clusters Can Make the National Economy 106 More Productive by Augmenting Agglomeration Economies Rejoining the Real World: Actual Incentive Practice Is Unlikely 107 to Have Net National Benefits A Simple Solution 108 Balancing State Sovereignty with National Interests 109 A National Proposal 111 Moving on from the Ideal 114 8 A Practical Path Forward 115 Transparency 115 Evaluation 116 Alternatives 118 A Full-Employment Economy 119 The Baby and the Bathwater 120 Notes 121 References 139 Author 149 Index 151 About the Institute 163 viii Figures 2.1 Average Incentive Offer as a Percentage of a Firm’s Value of Production 8 2.2 Typical State Incentives as a Percentage of a Firm’s Value of Production, 15 Various Years after Facility Opening 3.1 A Model of Incentives’ Benefits 19 3.2 Adding Incentive Costs to the Model 23 4.1 Baseline Income Shares vs. Share of Net Benefits
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