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3. Estimated Economic Development Effects of Well-Designed Business Incentive Programs
- W.E. Upjohn Institute
- Chapter
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53 3 Estimated Economic Development Effects of Well-Designed Business Incentive Programs This chapter provides estimates of a state’s economic development benefits from a well-designed business incentive program. The assumptions are detailed later, but here are the results: • For each dollar invested in this well-designed business incentive program, the present value of per-capita earnings of the original state residents will increase by $3.14. As explained in the previous chapter, this increase in state per-capita earnings is this book’s definition of economic development benefits. The “present value” calculation simply restates these future earnings in present dollars, so that they can be compared with dollars invested in business incentives.1 • Roughly three-fifths of these economic development benefits occur because of increases in the employment rates of state residents . The other two-fifths occur because of state residents’moving up to better-paying occupations.2 • These benefits occur because of the new jobs created by the business incentive program. These additional employment opportunities have persistent effects on the economic fortunes of many local residents. The extra job experience obtained by state residents increases their job skills, self-confidence, and reputation with employers. • As discussed in Chapter 2, there are probably some social benefits that accrue to local communities from higher local employment rates. Even those who don’t obtain new jobs or better jobs value these improvements for fellow community members. • The business incentive is modeled as if it were a state tax incentive provided to assisted businesses for a 10-year term. The same 54 Bartik dollar amount per job is provided upfront and for each of the next nine years. The 10-year term of the incentive is assumed because it corresponds to common state practice. If the incentives come in the form of services to businesses, the implicit assumption made in this baseline simulation is that these services have the same effect on business decisions as tax incentives of the same costs. • The business incentive program is assumed to have earnings effects that are scalable with program size. For example, devoting twice as many dollars to business incentives yields twice the earnings effects. • In this well-designed program, earnings benefits are greater than costs from year one. Earnings benefits for state residents in year one of the program are a little less than twice program costs. • Suppose this program is designed as a permanent program that begins at a certain level of activity in year one. This level then grows over time with the economy. This permanent business incentive program will have earnings benefits that start at a little less than twice the program costs in year one, decline gradually to about 1.5 times the program costs over the next 10 years, then increase gradually to a “permanent” ratio of earnings benefits to costs of about three and a half times the program costs over the next 45 years. Figure 3.1 shows how this ratio evolves over time.3 • This is not a typical business incentive program. It is perhaps best described as representing “current best practice.” It is designed so that the business incentives have no adverse impact on the quality of public services. The financing and design of the program are arranged so that the program has no net negative effect on local demand for goods and services. The incentive is delivered so that incentives can be “clawed back” if assisted businesses do not deliver the promised increase in jobs. The program is well-targeted at the businesses whose expansion will best help the economy. Specifically, the program is targeted at exportbased businesses paying an above-average wage premium and having a healthy local multiplier. Chapter 5 will discuss these and other ways in which policymakers can improve the design of business incentive programs. [107.23.85.179] Project MUSE (2024-03-19 06:05 GMT) Economic Development Effects of Business Incentive Programs 55 • Although these estimates are based on the best available evidence , the results are sensitive to different assumptions. Chapter 6 discusses how policymakers might deal with this uncertainty. Similar issues arise because of uncertainty about the effects of early childhood programs. These results are generated from a model of how incentives will affect a state economy. There are three main components to this model: 1) Empirical estimates of how business incentives affect business location decisions, 2) Assumptions about how the business incentive program is designed and financed, and Figure 3.1 Ratio of Annual State...