Do Economic Development Incentives Crowd Out Public Expenditures in U.S. States?

Abstract

This paper investigates whether economic development incentives (EDI) crowd out public expenditures in U.S. states. Using EDI data from a new database, this paper employs a two-way fixed effect panel framework and generalized method of moments (GMM) approach to account for dynamic features associated with public expenditures. Potential endogeneity of policy variables and problems with unbalanced panels are also addressed. Results show relatively little effect of incentives spending on most public goods expenditures contemporaneously, with negative repercussions beginning to appear in year one. Findings of this paper carry practical importance for policymakers concerning the efficacy of incentives.

Chasing Disparity: Economic Development Incentives and Income Inequality in the U.S. States

“…. that would compensate the state and its citizenry for the loss of resources.” Wang, Ellis, and Rogers (2018) also recognize the possibility of incentives having a redistributive effect, specifically through the displacement of welfare spending, citing Wang (2016) who found a negative relationship between incentive and welfare spending. But, the authors provide a number of other reasons that inequality could grow due to increased incentive spending, such as subsidizing the addition of jobs at the low and high end of the income distribution, crowding out the opportunity to restructure the state’s tax code to provide more widely shared benefits, and failing to bring sufficient economic benefits to offset the costs of incentives (Wang, Ellis, and Rogers 2018).…”

Economic Development Incentives: What Can We Learn From Policy Regime Changes?

“…Calcagno and Hefner (2018), for instance, used data from Good Jobs First to show that state fiscal and budget characteristics, such as budget issues, high tax and regulatory burdens, and poorly trained labor, explain the granting of targeted incentives. Wang (2016) also used data from Good Jobs First, finding that states that offer more incentives spend less on productive public infrastructure. The reduction in productivity-enhancing public infrastructure could offset any potential gains associated with incentivizing a firm or industry.…”

Do Targeted Business Subsidies Improve Income and Reduce Poverty? A Synthetic Control Approach

“…Alternatively, politicians may finance subsidies by shifting spending away from other government functions that may be more productive. Wang (2016) found that, as governments increase expenditures on targeted economic development incentives, public expenditures on education, health, and other productive public goods decline. The opportunity cost of shifting resources away from certain public expenditures to fund incentives is high, as Goetz, Partridge, Rickman, and Majumdar (2011) found, that “race-to-the-top” policies such as investments in education and infrastructure are more productive for economic growth than “race-to-the-bottom” policies such as targeted economic development incentives.…”