Essays on Economic Development Policies
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University of Kentucky UKnowledge Theses and Dissertations--Public Policy and Martin School of Public Policy and Administration Administration 2020 Essays on Economic Development Policies Hakyeon Lee University of Kentucky, [email protected] Author ORCID Identifier: https://orcid.org/0000-0002-3994-8558 Digital Object Identifier: https://doi.org/10.13023/etd.2020.295 Right click to open a feedback form in a new tab to let us know how this document benefits ou.y Recommended Citation Lee, Hakyeon, "Essays on Economic Development Policies" (2020). Theses and Dissertations--Public Policy and Administration. 36. https://uknowledge.uky.edu/msppa_etds/36 This Doctoral Dissertation is brought to you for free and open access by the Martin School of Public Policy and Administration at UKnowledge. It has been accepted for inclusion in Theses and Dissertations--Public Policy and Administration by an authorized administrator of UKnowledge. For more information, please contact [email protected]. STUDENT AGREEMENT: I represent that my thesis or dissertation and abstract are my original work. Proper attribution has been given to all outside sources. I understand that I am solely responsible for obtaining any needed copyright permissions. I have obtained needed written permission statement(s) from the owner(s) of each third-party copyrighted matter to be included in my work, allowing electronic distribution (if such use is not permitted by the fair use doctrine) which will be submitted to UKnowledge as Additional File. I hereby grant to The University of Kentucky and its agents the irrevocable, non-exclusive, and royalty-free license to archive and make accessible my work in whole or in part in all forms of media, now or hereafter known. I agree that the document mentioned above may be made available immediately for worldwide access unless an embargo applies. I retain all other ownership rights to the copyright of my work. I also retain the right to use in future works (such as articles or books) all or part of my work. I understand that I am free to register the copyright to my work. REVIEW, APPROVAL AND ACCEPTANCE The document mentioned above has been reviewed and accepted by the student’s advisor, on behalf of the advisory committee, and by the Director of Graduate Studies (DGS), on behalf of the program; we verify that this is the final, approved version of the student’s thesis including all changes required by the advisory committee. The undersigned agree to abide by the statements above. Hakyeon Lee, Student Dr. J.S. Butler, Major Professor Dr. Rajeev Darolia, Director of Graduate Studies ESSAYS ON ECONOMIC DEVELOPMENT POLICIES ________________________________________ DISSERTATION ________________________________________ A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in the Graduate School at the University of Kentucky By Hakyeon Lee Lexington, Kentucky Co- Directors: Dr. J.S Butler, Professor of Martin School of Public Policy and Administration and Dr. Merl Hackbart, Professor of Gatton College of Business and Economics Lexington, Kentucky 2020 Copyright © Hakyeon Lee 2020 https://orcid.org/0000-0002-3994-8558 ABSTRACT OF DISSERTATION ESSAYS ON ECONOMIC DEVELOPMENT POLICIES Tax increment financing (TIF) policy is the most popular economic development policy in the United States. Despite the popularity of research on TIF, only a few comprehensive reviews of previous studies on TIF policy tool have been conducted. In light of this, the purpose of this paper is to review previous TIF studies relating to the controversy surrounding TIF programs. Specifically, previous studies do not provide clear answers about the efficacy of TIF and, indeed, raise more questions than answers. At the same time, this situation begs the question: why do local governments frequently use economic development policies? This is the most urgent task in the economic development academic area because previous studies have not answered that question in detail. To analyze the effects of competition and the forms of government on the utilization of business incentives at the local government level, this study focuses on two major incentives: tax credit and tax increment financing. The statistical results show that the competition mechanisms operate differently for each of the incentives. More specifically, the council-manager system considerably constrains the overall adoption and extent of use of business incentives. These results could indicate the prevalence of a particular form of government for economic development policies. To determine why local governments often use tax-based incentives, this study focuses on five major tax-based incentives: job creation tax credits, investment tax credits, R&D credits, property tax abatements, and customized job training subsidies. The statistical results indicate that a state government’s prevailing political ideology influences the choice of economic development activities. Accordingly, a more liberal state may be more likely to discourage property tax abatements and customized job-training subsidies and encourage job creation tax credits. Additionally, the competition mechanism does not operate as a trigger for tax-based incentives. This study also finds that state economic conditions are inversely related to the use of incentives. This result could imply the prevalence of political factors in the use of incentives. Clear evidence about the effectiveness of economic development incentives is limited. To bridge this research gap, this study uses the Upjohn Institute Panel Database on Incentives and Taxes (PDIT). Unemployment and employment rates are used to analyze the effectiveness of tax-based incentives. Statistical results indicate that tax incentives have a marginal impact on employment status and limited benefits to states. Only the R&D tax credit statistically significantly increases employment rates. This result supports the interpretation of economic development policies as a zero-sum game KEYWORDS: Tax increment financing, Tax credit, Tax-based incentives, Zero-sum game, Diffusion mechanism Hakyeon Lee (Name of Student) 06/24/2020 Date ESSAYS ON ECONOMIC DEVELOPMENT POLICIES By Hakyeon Lee J.S Butler Co-Director of Dissertation Merl Hackbart Co-Director of Dissertation Rajeev Darolia Director of Graduate Studies 06/24/2020 Date TABLE OF CONTENTS LIST OF TABLES ............................................................................................................. vi LIST OF FIGURES .......................................................................................................... vii CHAPTER 1. An Overview of Economic Development Policy: Tax Incremental Financing. ................................................................................................................ 1 1.1 Introduction ......................................................................................................... 1 1.2 Economic Development ...................................................................................... 3 1.2.1 Definition of Economic Development ........................................................ 6 1.2.2 Evaluation Standard for Economic Development....................................... 7 1.2.3 Present Condition of Economic Development ............................................ 8 1.2.3.1 General Tax Policies ............................................................................... 8 1.2.3.2 Tax Incentives ......................................................................................... 9 1.2.3.3 Economic Effects of Tax-based Incentives........................................... 12 1.3 Tax Increment Financing .................................................................................. 16 1.3.1 What is TIF? ............................................................................................. 16 1.3.2 Local Policy Environment ........................................................................ 17 1.3.3 The TIF Process and Conditions ............................................................... 18 1.3.4 The Goal and Rationale of TIF ................................................................. 19 1.3.5 Trends in TIF and the Present Status of TIF ............................................. 20 1.4 Literature Review: Classification of Previous Studies on TIF ......................... 24 1.4.1 Land Valuation Studies ............................................................................. 24 1.4.2 Building Valuation Studies ....................................................................... 25 1.4.3 Unit of Analysis ........................................................................................ 25 1.4.4 Economic Development Outcomes........................................................... 27 1.4.5 Fiscal Outcomes ........................................................................................ 28 1.4.6 Evaluation of Previous TIF Studies .......................................................... 29 1.5 Summary and Recommendations ..................................................................... 30 CHAPTER 2. A Theoretical Model for a Zero-Sum Dilemma and the Diffusion Mechanism of Economic Development Policies (Tax Increment Finance) ..................... 32 2.1 Introduction ....................................................................................................... 33 2.2 The Characteristics of Economic Development Policy ...................................