Expert Commentary

Who offers tax-based business development incentives?

2011 paper by the National Bureau of Economic Research on the conditions that make special municipal tax deals likely and their association with political corruption.


City and county governments often compete with one another to attract businesses and thus improve the economic situation of their local residents. Most often this process of attracting business takes the form of a tax-based incentive, including abatement of taxes, tax credits or tax increment financing (TIF) for business or infrastructure enterprises.

A 2011 paper for the National Bureau of Economic Research, “Who Offers Tax-Based Business Development Incentives?” used the existing body of evidence from the International City/County Management Association and the World Tax Database in order to track patterns of tax-based business incentives offers extended by counties and cities in the United States. The paper’s authors are affiliated with the Federal Reserve Bank of Kansas City and the University of Michigan.

The findings include:

  • Governments representing poorer communities are more likely to offer business tax incentives. A 10% reduction in household income is associated with a 3.4% increase in likelihood of offering abatements or credits.
  • A 10% greater concentration of younger people is associated with a 3.7% higher probability of communities offering tax incentives. Also, those with less than 8% of workers employed in manufacturing offer tax incentives only 48% of the time, whereas communities with more than 18% in manufacturing offer tax incentives 64% of the time.
  • An increase of federal corruption crimes by 1 per 100,000 residents is associated with a 2.9% greater chance that a community offers any form of business incentives.
  • An increase in the rate at which government officials are convicted of federal corruption of 1 per 100,000 residents is associated with a 5.9% greater probability that a community will offer direct tax reductions rather than tax increment financing.

“American cities and counties frequently offer business development incentives; variations in this practice suggest some of their motives in doing so,” the authors write in the conclusion. “Communities with low incomes, those located close to state borders, and those in states with more troubled political cultures … are most likely to offer business development incentives when they stand to benefit from the resulting business activity and the economic environment.”

Tags: crime, ethics, infrastructure, corruption

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