In incentives have an effect on business in the

In the
United States, tax break programs like Start-Up-New-York are not uncommon. State
governments invest in the private sector using various
programs. Collectively, these programs are called economic development incentive programs.
Economic
development incentives are perks that are claimed to help companies build or
expand in the area. The economic development incentives are said to start an
upward spiral that creates jobs and truly boost the economy all over the state
through geographic targeting. The main target of the incentives are high-value
industries.

(Timothy J. Bartik 2017) Says
that for the entire nation, state and local business incentives had an annual
cost in 2015 of $45 billion. All though so much money is spend on these
incentives, information about the outcome of the incentives is difficult to
find. A investigation by goodjobsfirst
”States Ranked on Job-Creation Transparency” (2014) found that
three-fourth of large-scale state development programs do not reveal the amount
of jobs generated by the incentives.

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The incentives have
become very controversial because information about them is scarce and there
being various examples of the incentives not working properly (like Start-Up New York) In
some cases business take advantage of the incentives. Many people
question if the results are comparable to the enormous expenses.

The consequences of
wasting a great portion of tax money could be massive. In this time of economic
difficulties there should be extra attention paid to tax money being spend as
efficient as possible. These incentives have been used across the United States
for a long time and the money that is used on the incentives has steadily increased
in the last couple of decades The money could go to many different affairs.
Things that will make a difference. The potential tax money being saved or
spend otherwise (on infrastructure, education etc.) could have an effect on
every living person in the United States.

In this
paper I will investigate to what extent state economic development incentives
have an effect on business in the United States of America and if the
incentives are actually worth the investment.

I make use of
Literature Review in order to find as much
information as possible on state economic development incentives. The
literature I use consists of academic articles, news articles and books.

 

Structure

First,
I give a introduction on how the different states in the United States are
governed.

In chapter
2 I give a background to the use of economic development incentives. First, I
tell about the history of the incentives, followed with a short description of
the development of investments on the incentives in recent times. Then I
explain how the economic development incentives work in practice. (how businesses
can apply).

After
the background information, I discuss the goal of the incentives and how the
incentives are limited to when they are able to reach that goal. Directly
after, I compare the different arguments that economics and researchers give
for and against the incentives and give reasons to why the popularity of these
incentives is still rising, despite the lack of evidence.. At the end of the
theoretical framework, I formulate my hypothesis.

In
Chapter 3 I give my conclusion

 

Countries within a country

There are 50
different states in the United States of America. Each one of these states is
considered as primary subdivisions of the United States and they have
governmental jurisdiction over a separate geographic territory.

Individual states may
have more influence than a region, county or province would have in any another
country. The individual states are allowed to decide their own laws as long as
the law does not result in any conflict with the laws from the federal government.
The different states are also able to decide its own taxes and change their tax
rate. The income from the tax mostly goes to the states government and they
then mostly decide what to do with the income from taxes.

In
every state tax is collected in a different way. The local state’s governments
than decide how the income from the tax is spend. The tax is mostly used on
investments within the state. A state has no jurisdiction to influence tax
rates from other states. The legislatures from individual states is used in
order to choose between different tax rates on different taxes. In New York for example, income is taxed highly. On the contrary New Hampshire decided to lower the income
tax in exchange for higher property taxes.

Most
states are accountable to a non-discretionary balanced budget in order to
control state spending. This means that the state must try to balance its
budget every year so not too much money is spend. The state decides the tax rate and what to tax by
looking at what in their opinion would lead to a balanced budget.

 

 

Theoretical
Framework

History,
development and practice of tax incentives

According to Peter K. Eisinger (1989)The usage of tax incentives
in the United States can be traced back to a legislature’s decision in New
Jersey in 1791 where the State used a private company called the Society for
Establishing Useful Manufacturers, as an instrument to increase industrial
development. The State granted the private company, among other things, excuse from
state tax and the power to condemn property from its own use. This later led to
the first industrial park being build in the United States. Afterwards more and
more states started developing their own economic programs.

According to multiple sources (Margery Marzahn Ambrosius 1989, Chi
and Leatherby (1997), LaFaive & Hicks, 2005, Timothy J. Bartik 2017)
the usage state economic development incentives has dramatically increased in
the recent decades.  According to Bartik
the increase in incentive cost from 1990-2015 is two-thirds due to the immense
increase in money spend on Job Creation Tax Credits (JCTC’s). This  increase has made (JCTC’s) the biggest type of
incentive when looked at money invested. 
 

According to Rosenthal,
Corey ; Lanza, John ; Duffany, Patrick in New York tax credits and
incentives.(Columns: state & local taxation)In order to apply for an incentive program businesses are required to negotiate for the C&I
(Credits and incentives) packages with C&I administrators. These
administrators are certified to refuse a inquiry if it is not in the interest
of the economy of their jurisdiction.

 

The goal and limitations of the
incentives

The goal of the tax
incentives is to increase economic growth/welfare. This goal is achieved if the
incentives result in an net gain of jobs and an increase in future consumption.
This happens due to the multiplier effect. The investments made by the
expansionary fiscal policy increases income and therefore consumption.

Roger G. Noll and Andrew Zimbalist
(1997) say
that the economy can only grow if  the use of resources like natural
resources, people or capital investments becomes increasingly more efficient.
This will increase the productivity. According
to : noll and andrew This increase in productivity can happen in two
different ways: The first way is if the local community becomes more
specialized. This will give the community a comparative advantage and will
increase trade with different regions. The second way is if the community finds
a better way to add value than other uses of investments.

According to Noll and Zambalist Tax incentives increase future consumption and are
thus economically defendable under certain conditions. Firstly, giving tax
incentives to a company so it is able to expand (in the state) is only good for
the state’s economy, if it is the most productive way of using the employees
and capital investments. Secondly, the usage of the incentives must lead to
unemployed resources being used more productively overall. And finally if there
is underinvestment. Underinvestment is improbable. It is only likely to happen
if capital markets are failing when investing in the private sector or if
investments lead to considerable externalities.

Another limitation is given by Cowen, Tabarrok 2014  ). In their book Modern Principles of
Economics. tHE SOLOW model tells us that some levels(in theory) can reach a
steady state level of capital At this point 
every unit of investment is needed just to replace the capital that
depreciates in that period, When investment just covers the depreciation of
capital, the capital stock stops growing and output does as well. This tells us
that continuously investing might not always result in an increase in output
and economic development.

 

The positives
and  the negatives

These conditions can
be used to find the positives of the economic development incentives. The
incentives lead to an increase in productivity and more resources being used.
The incentives also increase the overall net investments. An increase in
investments leads to an upward spiral and increase in economic development.

 

Although the
incentives could have a positive effect on the economic development, there are
many reasons why people are against the massive spending that is used for the
incentives.

Most obvious is, the
lack of evidence that the economic development is actually worth the money that
is being used on the incentives. The results from the research that is done, can sometimes truly be
shocking. The Department of economic and
community development Stanley McMillen, Ph.D. 
Kathryn Parr  Troy Helming (2008)
found that for every dollar spend on film tax subsidies by Connecticut, the
state received a horrific return of 7 cent.

 

Michael J. Hicks and Michael LaFaive  (2011) find that the lack of consistency of companies being
given the incentives or not is a second argument that must be given against the
incentives. The lack of equity results in some firms not receiving the benefits
of the incentives while rival firms do. This consequence of this is a loss of
competitiveness on the market. Competitiveness is good for the economy because
it is a incentive for companies to continuously search for new ways to cut
costs are create new products etc. 

 

The third argument
against the incentives is given by (Zheng, Lingwen ; Warner, Mildred). They say that the rivalry between state governments is
extremely bad for the states that mostly count on the use of the incentives for
economic development. After investing in the incentives these states find
themselfs in stagnating or declining economies. The rivalry leads to states
being in a cycle of destructive competition against other states.  In
order to always one-up eachother, state’s relectunely loose money.

 

The fourth reason
against the incentives is the complexity of the incentive system. A complex
development system results in high compliance and administrative costs in order
to regulate and oversee the system. The complexity also results in corporations
finding ways to take advantage of the incentive program. The corporations try
to find loopholes in order to claim as much as the incentive program (in as
many states) as possible. A example of this is given by A hall family foundation study. The study found that the state of
Missouri lost $217 million in taxes because many business are collecting
incentives from both Kansas and Missouri by interchanging existing jobs between
the states. The companies then simply say they created new jobs and claim the
considerable incentives.

 

Popularity despite
the lack of evidence

Even though there is
little concrete evidence for the incentives, the popularity/use of the
incentives is ever rising. And why there
isn’t enough research being done This can be explained by a couple reasons.

 

Firstly, It may be
very costly for individual states to stop using the incentive program. (Ellis and Rogers (2000; Anderson and
Wassmer 2000) State’s risk losing companies (that the state depends on) to
rivalling states who will persist to invest in incentive programs. This
prisoners dilemma results in state’s continuously using money inefficiently.

 

Charles Lindblom(1982) gives a different look at the reason for the
popularity of the economic incentives. Businesses
in America have a big influence on the country’s politics. It is dubious, but even the current
president of the United States Donald Trump may have been elected partly
because he is a well known business man.

 Business fund
government campaigns etc.
The businesses are able to use economic mechanisms to (negatively) respond to
(unwanted) decision made by political leaders. Politicians scared to be made
out to possibly negatively affect the economy therefore refrain from changing
the policy.

 

 

A final reason is
given by (Cowen, Tabarrok 2014  ). In their book Modern Principles of
Economics they explain the concept of rational ignorance.

They say that if the
costs of something is diffused over millions of people. It may not be in the
peoples best interest to be informed about that something. Using this logic, I
think that most Americans probably do not even know what economic development
incentives are and why their tax money is potentially misused on the incentives.
On the other hand, the massive corporations that mostly benefit of the incentives
are rationally informed and because of this try to keep the investing in the
incentives going. Controversially, most benefits probably go to a small group
of people from the big companies in the state that receive massive tax cuts.
Money being wasted in politics is always a debate but because it personally
does not have a big effect on the average American, it is likely that the use
of the incentives may only continue to rise.

 

Hypothesis

I believe that the
economic tax incentives do have effect on business practices in the United
States. (but the effects are not worth the investments)  But I think the results of the tax incentives
have been researched too little to clearly say how big of an effect the
incentives have and if they are worth the investment. I feel that the
opposition are right to say that more research is needed.

 

 

 

 

 

 

 

Conclusion

The
goal of this paper was to determine if the incentives are actually worth the
investment. I found that the Use
of economic development incentives can be tracked back for a long time. The use of the incentives has consistently increased
since then and are now a considerable part of the money spend by the state
governments. Under certain conditions and in some cases the economic
development incentives could lead to a upward spiral with massive benefits to
economic development and welfare. (BOEK)
Unfortunately, bad design of the incentive plans causes the benefits to be
diminished. When an incentive plan is badly designed, the gap between what you
pay for and what you want increases. Strong incentives can be worse than weak
incentives if such a gap exists. This could be the case in some of the economic
development incentive plans and part of the reason why the incentives are not
performing correctly.

Because, there are
definitely,  multiple mistakes in the legislative
design of the tax incentives. It is obvious that in some cases of these
incentives are not aligned with the social interest. The requirements in order
to apply for the economic development incentives can be extremely lax resulting
in massive spending when compared to the benefits. Companies take advantage and
gladly receive ‘free’ money from the local government and do little to nothing
for the social interest in return. The rivalry from states results in states
finding themselves increasingly spending on the incentive plans in order to not
fall behind rivalling states and to comply with the demands from the MNO’s.

                                                                                                              

There is little
jurisdiction on how much states spend on these incentives. The amount of actual
data about the economic development incentives are in short supply. Al though
there is a lack of evidence, investments in the incentive programs are only
increasing. The reasoning behind this can be made clear by a couple of arguments. Firstly, Due to the prisoners dilemma, stopping or investing less in
economic development incentives could be very costly for individual states.
Secondly , Businesses and Politics are closely related in the United States. It
is in the best interest for some politicians to not upset the MNO’s. For
example so the MNO’s will continue investing in the politicians campaigns.

After reviewing
literature I have found that the economic development incentives do have a
considerable effect on business practises in the United States. The researchers
however have many difficulties calculating if the outcomes are worth the
investment. More research should be done and ,if afterwards deemed necessary,
looked at how to change the policy. Competition between states is not in the
best interest of the country .To solve this problem individual states need to
work more together so the different tax incentives supplement each other in
order to save money but still maintain the same level of economic development.

 

I hope that economic
development incentives get more exposure in the near future so that the average
American tax payer gets to know the subject. Only if that happens will there be
change in the policy.

 

 

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