State Business Incentives: Trends and Options for the Future

During the past three decades, states have developed various incentive programs designed to encourage economic activity in order to create, retain or expand business opportunities. In addition to tax and financial incentives, some states have used customized, company-specific incentives to engage in bidding wars with other states, making interstate competition for industries and businesses increasingly intense. Others have offered incentives to recruit business and financial investment from abroad.

  Download the Full Report:  State Business Incentives: Trends and Options for the Future

During the past three decades, states have developed various incentive programs designed to encourage economic activity in order to create, retain or expand business opportunities. In addition to tax and financial incentives, some states have used customized, company-specific incentives to engage in bidding wars with other states, making interstate competition for industries and businesses increasingly intense. Others have offered incentives to recruit business and financial investment from abroad.

Many have looked to foster new business opportunities—like those found in the “Green Economy.”

Throughout this report, the term “Green Economy” and “Clean Energy Economy” will be used interchangeably. The Pew Charitable Trust’s 2009 Report, The Clean Energy Economy, defines this new economic segment: “A clean energy economy generates jobs, businesses and investments while expanding clean energy production, increasing energy efficiency, reducing greenhouse gas emissions, waste and pollution, and conserving water and other natural resources.”

Now, in the face of severe fiscal turmoil, policymakers are looking at their incentive programs more closely to ensure they are truly getting a return on their investments. To help state policymakers make informed decisions, The Council of State Governments has published a number of reports on state business incentives, including The States and Business Incentives: An Inventory of Tax and Financial Incentive Programs in 1989 and two editions of State Business Incentives: Trends and Options for the Future—one in 1997 and another in 2000.

This report is the third edition of State Business Incentives. It contains information and data on business incentives offered by states; trends in the types of incentives offered; discussion of the accountability and oversight of incentive programs; and policy options and courses of action for state policymakers to consider for the future. New in this report is a discussion of two policy areas in which states have become increasingly engaged: international economic development and the “Green Economy.”

A new feature for this year’s report is an accompanying Web tool that provides access to state business incentive profiles. The

Web tool provides information about the state’s primary economic development agency or program and allows users to compare a number of measures across states, including:

  • Current incentives offered
  • Key tax rates including personal and corporate income and excise tax rates
  • Key indicators such as educational attainment, income and population

Use the Web tool at: www.csg.org/businessincentives.

In this report, the term “business incentives” is broadly defined as public subsidies, including, but not limited to, tax abatement and financial assistance programs designed to create, retain or lure businesses for job creation. The term “tax incentives” broadly refers to any credits or abatements of corporate income, personal income, sales-and-use, property or other taxes to create, retain or lure business. The term “financial incentives” broadly refers to any type of direct loan, loan guarantee grant, infrastructure development or job training assistance offered to help create, retain or lure businesses.

Executive Summary:

  • From the 1970s into the late 1980s and early 1990s, the number of states providing tax and financial incentives to businesses and the types of incentives being offered increased significantly. Over the past 10 years, the number of states offering incentives of varying degrees and types has become relatively stable.
  • In 1977, at least 28 states offered tax concessions or credits to businesses for equipment and machinery, goods in transit, manufacturers’ inventories, raw materials in manufacturing and job creation. In 1998, the number of states offering those incentives had grown to 42 and by 2008 that count stood at 44 states.
  • The number of states offering an excise tax exemption in 2008 stood at 28—nearly triple the 10 states offering it in 1977. In 1977, 21 states offered a corporate income tax exemption and 19 states offered a personal income tax exemption—by 2008 the number of states offering these exemptions grew to 41 and 37 respectively.
  • Similarly, the number of states with financial incentive programs also increased over the past three decades. In 1977, fewer than 20 states offered special low-interest loans for building construction, equipment, machinery, plant expansion and establishment of industrial plants in areas of high unemployment. By 1998, more than 40 states offered those incentives—a number that remained essentially the same over the next decade.
  • During the past 10 years in particular, export promotion for small-and medium-sized enterprises has become an increasingly important component of state economic development strategies. Nearly half of those states responding to a CSG survey reported providing grants to small businesses as part of their export assistance portfolios.
  • The “New Energy Economy” has emerged alongside export promotion as a key focus of state economic development programs, with as many as 39 states developing policies and making explicit investments to advance green economic development as part of their Great Recession recovery strategies. 
  • Every state plus the District of Columbia and Puerto Rico offers two or more types of incentives for renewable energy. Similarly, 48 states, the District of Columbia and Puerto Rico offer at least one type of incentive for energy efficiency. 
  • Amid significant fiscal stress, ensuring state incentive programs are garnering a return on investment is paramount. States are now using a number of strategies to make sure their investments are paying off, including specifying qualifications for benefits, strengthening the approval process, increasing public disclosure and accountability, instituting clawback provisions, using sunset rules, and performance audits.

  Download the Full Report:  State Business Incentives: Trends and Options for the Future

This report is an update to one published in 2000, authored by Dr. Keon S. Chi and Daniel J. Hofmann.  Download the previous edition here