For decades, one of the principal state and local economic development tools has been tax incentives. Every state offers incentives in one form or another to retain business and attract businesses from other states. According to one survey, 95 percent of U.S. municipalities also use such incentives.
Some policymakers have expressed a desire to end this practice but feel stuck in an arms race. They fear they cannot unilaterally forgo incentives because others use them, so they create ever-increasing incentive packages in an effort to compete.
Although some incentives may be economically justified in terms of jobs and productivity, in the midst of an arms race it's difficult to tell what is and is not effective in creating jobs.
One thing that is known is that this practice costs taxpayers billions of dollars each year. Estimates put the annual cost near $70 billion. Moreover, incentives targeting existing companies miss the economy's real engine of job creation: new and young businesses, which create nearly all net new jobs in the United States, a fact that also holds true at the state and city level.
Policymakers have heard these arguments before, but need ideas, not criticism. The Kauffman Foundation hosted a conference of state legislators, mayors, researchers, and leading thinkers to discuss two themes related to incentives.
First, how can incentive programs be improved to better promote economic growth?
Second, what alternative strategies exist for promoting economic development through entrepreneurship?
State and local governments may not abandon tax incentives entirely, but program administration and design can be made more effective.
For states, cities, and counties reconsidering the use of tax incentives, alternatives exist that would help foster entrepreneurship as well as a dynamic market that generates jobs and innovations.
Reexamine Professional & Occupational Licensing
Cultivate Human Capital
Connect Entrepreneurs with Resources
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