Local Taxes and Incentives for Jobs Creation

Late last year the electric carmaker Tesla chose Nevada as the site of its future “gigafactory,” where it will produce all of the batteries to power its vehicles. The company expects the factory to cost $5 billion to build and to eventually employ around 6,000 people. Tesla cited Nevada’s offer of low taxes as an important factor in its decision to locate there rather than in one of the several other states vying to host the factory. In addition to having no individual or corporate income tax, Nevada enacted a package of tax incentives—including refundable credits for job creation and investment, sales tax exemptions, and property tax abatements—specifically for Tesla to enhance the state’s attractiveness .

The Tesla-Nevada deal is just one of the latest high-profile business location decisions in which state and local tax policy purportedly played a critical role. Such deals tend to stir up renewed interest in the long- standing policy debate about the role of state and local taxes and incentives in affecting where jobs and economic activity are located. There are several key questions to consider in this debate: Does local tax policy actually have an important effect, or do businesses base their decisions of where to locate primarily on nontax factors? Do the potential benefits to the local area exceed the cost of the tax revenue that is lost? Are these policies a zero-sum game nationally, such that economic activity simply shifts from high- tax/low-incentive areas to low-tax/high-incentive areas? Finally, would the nation as a whole be better off if such tax competition were banned? This Economic Letter discusses some key concepts and related research to help guide the policy debate surrounding these questions. I start by describing the main tax policy tools used for local economic development.

Chosen excerpts by Job Market Monitor. Read the whole story at Competing for Jobs: Local Taxes and Incentives