Local tax breaks to lure firms don’t boost economies: Study

Juicy tax breaks intended to lure in companies and boost local economies may not be worth it, according to a new working paper published by the National Bureau of Economic Research.

“While we find some evidence of direct employment gains from attracting a firm, we do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level,” Cailin R. Slattery and Owen M. Zidar wrote in their paper, which specifically looked at subsidies that targeted individual companies for local investment.

The issue of offering firm-specific subsidies most recently came to national attention when Amazon ran a contest for which city would house its second headquarters, dubbed HQ2.

In the end, it split the prize between New York and a Virginia suburb of Washington, D.C.

Following an outcry over the extent of the tax breaks offered to the company, including harsh criticism from Rep. Alexandria Ocasio-Cortez (D-N.Y.), Amazon withdrew its plans for New York, but continued to expand its existing offices there.

The study found that attracting firms through tax breaks did create jobs — as many as 1,500 — but that the new jobs did little to boost the local economy.

The average subsidy required to attract a firm creating 1,500 jobs was $178 million, amounting to a cost of $118,667 per job, with little spillover for the rest of the community.

“Collectively, these incentives amounted to nearly 40% of state corporate tax revenues for the typical state, but some states’ incentive spending exceeded their corporate tax revenues,” the paper found.

Poorer communities, in general, had to pay more than rich ones to attract firms, which preferred “richer, larger, and more urban” locales.

Worse, states and cities often have to raise other taxes to cover the costs of the subsidies. As a result, the authors concluded, “providing additional incentives may not always lead to higher welfare in the state, especially at high levels of incentives.”

Lowering the overall tax rate, the authors noted, could be more effective at boosting growth, though that approach could also cut into beneficial public services.