How effective are economic development incentives? According to many economic development agencies, tax incentives are critical to business location decisions. “But for” the incentive, most or all incented rms would not have chosen to locate, expand, or retain jobs at this location.
These high “but for” percentages are exaggerated. This research review shows that the likely “but for” percentage for typical incentives is less than 25 percent. At least 75 percent of the time, the same local job creation would have occurred without the incentive.
The “but for” percentage helps determine incentives’ benefits. If incentives tip 100 percent of location decisions, most incentives provide local residents with benefits greater than costs. If incentives tip only a few business location decisions, incentive benefits are more questionable.
Policymakers should know the following about incentive research:
1) Based on 30 studies, the “but for” percentage for typical incentives probably lies between 2 percent and 25 percent.
2) Most current estimates of the “but for” percentage are positively biased. The firms or areas receiving more incentives would tend to be growing more anyway, even without the incentives.
3) Policymakers should doubt claims of incentive benefits that assume that all or even most of the jobs associated with incented firms were due to the incentive. Studies should include more conservative scenarios, in which less than 25 percent of incentives tip location decisions.
4) Improvements in incentive evaluations require new empirical studies that better measure business cost variation due to taxes and incentives. Such studies would allow more precise estimates of incentive effects and benefits.