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5. Design Matters: What Features of Business Incentive Programs and Early Childhood Programs Affect Their Economic Development Benefits?
- W.E. Upjohn Institute
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113 5 Design Matters What Features of Business Incentive Programs and Early Childhood Programs Affect Their Economic Development Benefits? The preceding chapters have argued that business incentive programs and early childhood programs can provide large economic development benefits, if these programs are high-quality programs. But what constitutes quality in these programs? What program designs are most effective? This chapter discusses in turn some key features of, first, business incentive programs and, second, early childhood programs that affect their economic development benefits. Program design’s effects on economic development benefits turn out to be large. BUSINESS INCENTIVES Chapter 3 estimates that each dollar invested in business incentives increases the present value of the earnings of state residents by $3.14. In this book’s terminology, that means that, per dollar of costs, the “economic development benefits” for state residents are $3.14. This return on business incentives depends upon particular assumptions about the features of a business incentive program. These economic development benefits might be altered up or down by changes in these features. The economic development benefits of business incentives are principally altered by three features: 1) how the incentives are financed, 2) which businesses the incentives target, and 3) how the incentives are designed. 114 Bartik Incentive Financing I conclude with a two pronged warning about why we can’t keep giving money away in wasteful corporate subsidies. We have far more urgent needs to spend our money on to really create good jobs. Instead of steering so much money into private deals that are unaccountable and ineffective, we need to get back to basics and invest in public goods, especially our skilled labor base and our infrastructure. —Greg LeRoy (2005, p. 197) The fact that public spending can stimulate the economy more than tax cuts should come as no surprise. After all, when taxes are cut, part of the forgone tax revenue will not be spent locally—some of it will be saved, some will be spent out of state, and some will be taxed by other jurisdictions. But when taxes are raised in order to increase public services, the additional spending is typically done locally. —Robert Lynch (2004, p. 46) In Chapter 3, I estimated the economic development benefits of business incentives, under certain assumptions. One assumption was that the incentives were financed without negative effects on demand for goods and services in the regional economy. I also assumed that the incentives were financed without negative effects on the quality of public services. Reduced quality of public services might negatively affect business location and expansion. As Greg LeRoy argues in the above quotation, local job creation depends upon the quality of an area’s labor force and infrastructure. Suppose instead that business incentives are financed by increases in household taxes. This will negatively affect local demand for goods and services because it reduces the after-tax income of local households . The incentives transfer resources from local households to the owners of firms. Because many of these owners live out of state, the increased income of owners will have little impact on local demand. I estimate that household tax financing of business incentives will reduce the present value of the earnings increase for state residents, per dollar of resources devoted to business incentives, from $3.14 to $3.07. This estimate is based on simulations using a well-respected regional econometric model, the REMI model.1 [44.197.251.102] Project MUSE (2024-03-19 04:46 GMT) Design Matters 115 Suppose instead that the business incentives are financed by cuts in public services. Suppose initially that the public services cuts are not valued by businesses, and hence play no role in altering business location decisions. But this public spending cut will still reduce demand for local goods and services. Based on the REMI model, this cut in public spending will reduce the state economic development benefits of business incentives, per dollar of resources devoted to business incentives, from $3.14 to $3.03.2 The negative demand effect of lowering public spending is greater in magnitude than the negative demand effect of increasing household taxes. Why is this so? The public spending cut has a direct effect on reducing the demand for local goods and services and reducing local jobs. The tax increase on households only has indirect effects on reducing demand for local goods and services. A portion of the reduction in after-tax household income will be reflected in lower spending on local goods...