Equitable Economic Development Part 2: What Works For Economic Growth and Equity

Read Part 1: Why Tax Breaks For Business Are A Bad Deal For Public Budgets

As discussed in Part 1 of this series, policymakers face a lot of pressure to deliver the goods when it comes to job creation. But while announcements touting corporate relocations may get media attention and praise, the tax incentive packages that policymakers typically offer corporations are likely to hinder economic growth and reduce job creation in the long run.

Overall tax levels don’t make or break corporate location decisions in the overwhelming majority of cases because those costs are dwarfed by other considerations, like the presence of a skilled workforce, the quality of infrastructure, and the availability and quality of other public services.

That is probably why the research on economic development policies shows that direct investments in public services are more cost-effective than tax breaks. For example, we can contrast the experience with the original Empowerment Zone program – which was a federal program that offered public service block grants in addition to tax credits – with the evidence from state enterprise zones that rely almost exclusively on tax breaks to induce development.

The Empowerment Zone program of 1993 relied on two mechanisms to help reverse the economic decline of distressed communities. The first was a 20 percent employment tax credit available to firms against wages earned by each employee that both lived and worked in the designated community. The other mechanism was a “Social Services Block Grant,” the funds of which could be used for technical assistance for businesses, infrastructure investment, youth services, and training programs. A comprehensive 2010 analysis of the performance of these Empowerment Zones found that they successfully increased employment and wages within the zones. The authors concluded that the block grants “paid for themselves many times over by raising local productivity.”

Enterprise Zones, on the other hand, rely solely on various forms of tax incentives to businesses, including credits and other incentives to reduce business’ sales, property, and income tax burdens. In contrast with empowerment zones, enterprise zones have generally not been found to increase employment or wages. The evidence in favor of enterprise zones is so thin that some researchers have questioned why policymakers continue to rely on them so heavily and consistently.

Research is rarely 100 percent conclusive, so there can be reasonable disagreements over the exact magnitude of the impacts from these different programs. But any good faith reading of the literature shows there is little reason to expect tax incentives for businesses to “pay off” if they aren’t coupled with direct public investments in workers and infrastructure.

In the final blog in this series, I’ll go over some of the economic development policies the state of Arkansas uses and make recommendations for how we could modify them to support more equitable outcomes for workers and lower-income taxpayers.