Do Targeted Business Tax Subsidies Achieve Expected Benefits?

Do Targeted Business Tax Subsidies Achieve Expected Benefits?

By Rebecca Lester, Lisa De Simone, Aneesh Raghunandan
February 1,2019Working Paper No. 3762

We examine the association between state and local firm-specific tax subsidies and business activity in the surrounding county, measured as the number of business establishments, number of employees, aggregate wages, per capita employment, and per capita wages. Using a propensity score matched sample, we find that tax subsidies are positively and significantly associated with the number of business establishments and per capita employment and wages. We also observe an increase in the number of employees, but only among the 51 “megadeal” subsidy packages that include a variety of state and local benefits; furthermore, population growth following such megadeals appears to negate per capita employment effects.  For over 2,000 of the smaller tax subsidies in our sample, we observe limited to no significant relation with employment levels and wages. Finally, we observe that the effectiveness of the subsidies varies based on state-level disclosure about these awards, demonstrating that increased disclosures enhance public monitoring of tax subsidy efficiency. We provide a large-scale empirical analysis of the relation between firm-specific tax subsidies and aggregate economic activity at the county level, thus extending a literature that generally focuses on the real effects of statutory tax policies that impact all firms within a jurisdiction.