Benefits vs. costs of incentives.
The issues are whether benefits of incentives outweigh costs, and how benefits and costs are affected by local conditions and incentive design.
Empirical research on taxes and business location suggests that state and local taxes have a statistically significant effect on business location decisions. Local job growth has significant effects on the earnings of local residents.
Economic development incentive programs are more likely to pass a benefit cost test if (1) local unemployment is high, so the new jobs are needed by local residents; (2) the jobs pay higher wages; (3) more of the jobs go to local residents.
Targeting some firms for greater incentives than others may be rational. Such targeting should not, however, be based on political pressure or media attention. Targeting should be based on which firms are likely to provide greater social benefits at lower incentive costs. Reasonable targets include firms that provide greater social benefits because they pay higher wages, or are more likely to employ local residents.
Incentives vs. small business assistance.
Customized government assistance to particular businesses does not always represent an “incentive” designed to attract businesses and increase job growth. Small business assistance programs provide customized services to small businesses to improve their productivity. Such services to small business include help with job training, technology, exporting, financing and business management. These programs are efficient if they increase business productivity by more than their costs.
The timing of incentives.
Both economic efficiency and theories of public decision-making suggest that better decisions will be made if incentives are required to be provided upfront. “Clawback” provisions should be attached to these upfront incentives, allowing some incentive funds to be recovered if the promised jobs do not arrive or later disappear.