Chip Taylor

Criticisms of economic development incentives

The use of economic development incentives -- the granting of tax breaks and other subsidies to businesses as a reward for locating in a given area -- comes under a lot of criticism. A couple of examples of criticism can be found here and here.

The criticisms generally fall into three categories:

1. Incentives are an inefficient use of government resources. That is, the money would be better spent improving roads, schools, or other public services or infrastructure that would, in turn, attract business investment.

2. Incentives lead to inefficent location of industry. That is, firms locate where they get the biggest subsidy, rather than in the location that lowers overall resource use, thus lower national productivity.

3. Incentives create an unfair distribution of the tax burden. That is, mobile firms -- particularly multi-state or multi-national corporations -- pay lower taxes than local and/or small businesses.

Over the next several days, I want to address each of these criticisms. Not to defend incentive use necessarily, but rather to bring up some issues that are frequently neglected in popular discussion of economic development incentives.