In fact, their research shows that economic development incentives like those 20 US cities are currently dangling in front of Amazon don’t actually alter corporations’ behavior much. Many times the companies end up doing exactly what they would have done without a tax abatement or cash grant. Offering incentives comes with costs. In Texas, much of the money for municipal tax incentives comes out of the state public school fund. Also, the incentives end up taking the place of other sorts of government market interventions. Some of those alternative interventions have much higher rates of return on investment.
Despite their high cost and the frequent failure of these incentives to help, they are becoming much more common. In 1999, only half of cities offered incentives. Ten years later, more than 90 percent had.
So, why is a failed policy becoming ever more common?
Because it’s not failing everyone. Politicians who offer incentives consistently benefit at the polls. Despite their failures, incentive offerings to corporations are enduringly popular with voters. So much so that even politicians who fail to convince a company to locate in their municipality can benefit, simply from having made the offer. Their offer shows the public that they tried. And trying brings voters back out to the polls.
Jensen and Malesky’s work considers many questions beyond those raised in this post. They also explore those lightly touched on here in much greater detail and nuance. In Incentives to Pander they devote a chapter to evaluating whether offering incentives brings benefits to cities. Another chapter shows just how much politicians benefit from offering incentives.
- Nathan Jensen teaches in the Department of Government at The University of Texas at Austin.
- He has written in many national publications on these issues: a New York Times op-ed on economic development incentives, another at New York Times on the lack of transparency of these programs and one at the Austin Statesmam on incentives and education.