States spent $45 billion on incentives in 2015...was it worth it?

According to a new report from Timothy Bartik, senior economist at the Upjohn Institutestate and local governments more than tripled the incentives - mostly tax credits - they offered businesses in hopes of spurring economic growth between 1990 and 2015. In 2015, those incentives totaled $45 billion and the average incentive package had an annual value of over $2,400 per job.

To put that into perspective, that's more than half of what states collectively spent on higher education, almost twice as much as they spent on corrections and four times as much as on public assistance. 

Although spending on incentives has increasingly been a key component of state economic development strategies (particularly when viewed from a "dollars invested" perspective) state policymakers have largely been in the dark when it comes to the return on investment for those incentives. In fact, it has historically been difficult to even find information on how much states were spending on these incentives - much less understand if they were actually spurring economic activity. 

In 2013, members of the CSG National Working Group on Economic Development—including legislators, economic development practitioners and private sector members from across the country and political spectrum—openly and candidly discussed their concerns and observations about the use of business incentives in their states. A lack of information and transparency was the biggest concern for the group.

In the final report, the group noted: "State leaders simply don’t have enough reliable information to make informed decisions regarding how, when or even if certain business incentives should be used. Given the scarcity of state resources and the significant amount of money being spent on incentives, this is a huge concern.”

Bartik's newest report, accompanied by a database, could be a big step forward in beginning to solve this transparency issue. It provides the most comprehensive look to date at state and local incentives to attract new business locations or expansions.

Findings from the report and database include:

  • Incentives are large and growing. From 1990 to 2015, state and local incentives to export-based businesses grew from 9 percent of state and local business taxes to 30 percent.
  • Incentives are a significant investment. In 2015, the average incentive package had an annual value of over $2,400 per job.
  • Incentives are not sufficiently targeted towards the industries that could provide the strongest returns, such as those that pay high wages and that spend more on research and development. Industries that paid 10 percent higher wages received only a 3 percent greater amount of incentives than other industries.
  • Incentives vary widely across states. In many cases, neighboring states offer significantly different incentives even though their economic conditions and gross business taxes are similar. The use of economic incentives is not correlated with a state's unemployment rate.
  • Industry-specific incentives don't always yield industry growth. Larger incentives in a state for a particular industry do not appear to have any strong effect on that industry's growth rate in the state.

"These findings suggest that incentives should be better evaluated to rein in costs and improve targeting," says Bartik in a press release. "For example, greater targeting on high-wage businesses will not only offer higher wages to state residents, but the greater purchasing power of workers will result in a greater multiplier boost to state employment."

The database covers 33 states and 45 industries during the period of 1990-2015, and tracks job creation tax credits, property tax abatements, investment tax credits, research and development tax credits, and customized job training. The states included comprise over 90 percent of U.S. output, and the 45 industries are responsible for over 90 percent of U.S. employment. Perhaps most importantly, one can use this database to not only explore incentives across states, industries, and time, but it also allows policymakers to investigate the efficacy of the incentives they offer.

Access the database HERE and access the report HERE