The Effectiveness of Firm-Specific State Tax Incentives in Promoting Economic Development: Evidence from New York State's Industrial Development Agencies

Abstract

This article discusses the effectiveness of industrial development agencies (IDAs) in contributing to economic development in New York State by providing firm-specific tax incentives. The costs of IDAs, especially in terms of forgone tax revenues, are documented. The benefits of IDAs are partially reviewed, and a methodology for the wider evaluation of the benefits of IDAs-which may yet become possible—is set forth. The authors conclude that New York State's experience with its IDAs provides evidence that firm-specific tax incentives are ineffective in promoting economic development. The reason is straightforward: An analysis of the evidence shows that the benefits of IDAs are questionable, whereas their costs, in terms of forgone tax revenues, are clear and substantial. Between 1987 and 1991, for example, IDA activity resulted in few verifiable economic benefits to New York State, although causing state and local governments to lose over $1.3 billion in tax revenues.

“But For” Percentages for Economic Development Incentives: What Percentage Estimates Are Plausible Based on the Research Literature?

“…This is probably positively biased because counties that grow more will attract more LB775 investment. , Fishgold, & Blackwood (1996). Evaluated IDAs in NY State, which effectively provide long-term tax abatements.…”

Business Incentive Use Among U.S. Local Governments: A Story of Accountability and Policy Learning

“…According to Lynch (2004), studies conducted in the 1950s to mid-1970s found no significant positive impact of tax incentives or negative impact of taxes. In a study of New York State's industrial development agencies, Lynch, Fishgold, and Blackwood (1996) concluded that firm-specific tax incentives are ineffective in expanding the local tax base and promoting economic development. A study of business tax incentives across Nebraska's 93 counties from 1987 to 1995 found that business incentives had a positive and statistically significant impact on promoting economic development for low-unemployment counties but no statistically significant impact on generating economic development for high-unemployment counties (Goss & Phillips, 1999).…”

Economic development incentive program deadweight: The role of program design features, firm characteristics, and location

“…This net new activity is variously called the “but for” effect (Bartik, ), “additionality” or “incrementality” in the small business finance literature (Riding, Madill, & Haines, ), and its complement, referred to as “deadweight” by several European authors (Lenihan, ; Tokila et al, ). Studies that attempt to gauge these impacts have generally taken four different approaches: (a) hypothetical firm simulation approach (Fisher & Peters, ), (b) ex post econometric estimation of incentive effect on employment (Brown & Earle, ; Faulk, ; Jensen, , ), (c) indirect estimation based on state business activity tax elasticities (Bartik, ), and (d) analysis of survey self‐assessments (Lenihan, ; Lynch, Fishgold, & Blackwood, ; Jensen, ; Tokila & Haapenen, 2011; Tokila et al, ).…”