Skip to main content

Advertisement

SpringerLink
Log in

The political economy of state-provided targeted benefits

  • Published:
The Review of Austrian Economics Aims and scope Submit manuscript

Abstract

The governments of American states often attempt to incentivize businesses to locate within their borders by offering targeted benefits to particular industries and companies. These benefits come in many forms, including business tax credits for investments, property tax abatements, and reductions in the sales tax. Despite good intentions, policymakers often overlook the unseen and unintended negative consequences of targeted-benefit policies. This paper analyzes two major downsides of these policies: (1) they lead to a misallocation of resources, and (2) they encourage rent-seeking and thus cronyism. We argue that these costs, which are often longer-term and not readily observable at the time the targeted benefits are granted, may very well outweigh any possible short-term economic benefits.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Our analysis also contributes to the Austrian literature exploring “urban interventionism” (see Ikeda and Staley 2004; Pennington 2004; Desrochers and Sautet 2004; Ikeda 2004; Staley 2004; Holcombe 2004) and on attempts to create export zones to foster economic development (Seshadri, and Storr 2010).

References

  • Abrams, B., & Schitz, M. D. (1978). The ‘crowding-out’ effect of governmental transfers on private charitable contributions. Public Choice, 33(1), 29–39.

    Article  Google Scholar 

  • Acemoglu, D. (1995). Reward structures and the allocation of talent. European Economic Review, 39, 17–33.

    Article  Google Scholar 

  • Aligica, P. D., & Tarko, V. (2014). Crony capitalism, rent seeking, institutions and ideology. Kyklos, 67(2), 156–176.

    Article  Google Scholar 

  • Bairam, E., & Ward, B. (1993). The externality effect of government expenditure on investment in OECD countries. Applied Economics, 25(6), 711–716.

    Article  Google Scholar 

  • Baldwin, R. (2012). Trade and Industrialization after Globalization’s 2nd Unbundling: How Building and Joining a Supply Chain Are Different and Why It Matters. NBER working paper. Available online: http://www.nber.org/chapters/c12590.pdf.

  • Barnet, R. J. (1994). Lords of the Global Economy: Stateless Corporations.Nation, 19 December 1994, 259(21).

  • Bartik, T. J., & Erickcek, G. A. (2012). Simulating the Effects of Michigan’s MEGA Tax Credit Program on Job Creation and Fiscal Benefits. Upjohn Institute working paper 121–85. Available online: http://research.upjohn.org/up_workingpapers/185/.

  • Basker, E. (2005). Job creation or destruction? Labor market effects of wal-mart expansion. Review of Economics and Statistics, 87(1), 174–183.

    Article  Google Scholar 

  • Baumol, W. J. (1990). Entrepreneurship: Productive, unproductive, and destructive. Journal of Political Economy, 98(5), 893–921.

    Article  Google Scholar 

  • Becker, G. S. (1983). A theory of competition among pressure groups for political influence. Quarterly Journal of Economics, 98(3), 371–400.

    Article  Google Scholar 

  • Billings, S. (2009). Do enterprise zones work? An analysis at the borders. Public Finance Review, 37(1), 68–93.

    Article  Google Scholar 

  • Binder, M. (2008). Give Film Industry Tax Credit a Chance to Grow State Jobs.Detroit Free Press, June 18, 2008.

  • Boarnet, M. G., & Bogart, W. T. (1996). Enterprise zones and employment: Evidence from New Jersey. Journal of Urban Economics, 40, 198–215.

    Article  Google Scholar 

  • Boettke, P. J. (1998). Economic calculation: The Austrian contribution to political economy. Advances in Austrian Economics, 5, 131–158.

    Google Scholar 

  • Boettke, P. J., & Leeson, P. (2004). Liberalism, socialism, and robust political economy. Journal of Markets and Morality, 7, 99–111.

    Google Scholar 

  • Bondonio, D., & Engberg, J. (2000). Enterprise zones and local employment: Evidence from the States’ programs. Regional Science and Urban Economics, 30(5), 519–549.

    Article  Google Scholar 

  • Buchanan, J. M., & Congleton, R. (1998).Politics by Principle, Not Interest: Toward Nondiscriminatory Democracy.Cambridge University Press.

  • Buchanan, J. M. (1986). The Constitution of Economic Policy. Nobel Lecture, in: Nobel Lectures: Economic Sciences 1981–1990 (Karl-GöranMäller ed.),180-9.

  • Burnett, J.(2011). State Business Incentives: Trends and Options for the Future.The Council of State Governments report.

  • Busso, M., Gregory, J., & Kline, P. (2013). Assessing the incidence and efficiency of a prominent place based policy. American Economic Review, 103(2), 897–947.

    Article  Google Scholar 

  • Calcagno, P. T., & Hefner, F. (2009). South Carolina’s Tax Incentives: Costly, Inefficient and Distortionary. Ch. 7 in Unleashing Capitalism: A Prescription for Economic Prosperity in South Carolina (Calcagno, P. J. ed.), 131–47.

  • Catawba County Board of Commissioners and Maiden Town Council,(2009). Resolution No. 2009: Resolution Authorizing Economic Incentives for Apple Inc. Joint Special Meeting with Maiden Town Council, July 6, 2009. Available online: http://www.catawbacountync.gov/commish/minutes/070609spec.pdf.

  • Chandler, A. D. (1990). Scale and Scope: The Dynamics of Industrial Capitalism, Harvard University Press.

  • Cohen, J. E. (1986). The dynamics of the ‘revolving door’ on the FCC .American. Journal of Political Science, 30(4), 689–708.

    Article  Google Scholar 

  • Cowen, T. (2007). When should regions bid for artistic resources? Review of Austrian Economics, 20, 1–10.

    Article  Google Scholar 

  • Coyne, C. J. (2013). Doing bad by doing good: Why humanitarian action fails. California: Stanford University Press.

    Google Scholar 

  • Coyne, C. J., Sobel, R. S., & Dove, J. A. (2010). The non-productive entrepreneurial process. Review of Austrian Economics, 23, 333–346.

    Article  Google Scholar 

  • Desrochers, P., & Sautet, F. (2004). Cluster-based economic strategy, facilitation policy and the market process. Review of Austrian Economics, 17(2/3), 233–245.

    Article  Google Scholar 

  • Di Tommaso, M. R., & Schweitzer, S. O. (2013).Industrial Policy in America: Breaking the Taboo. Edward Elgar Publishing Ltd.

  • Elvery, J. A. (2009). The impact of enterprise zones on resident employment: An evaluation of the enterprise zone programs of California and Florida. Economic Development Quarterly, 23(1), 44–59.

    Article  Google Scholar 

  • Enrich, P. D. (1996). Saving the states from themselves: commerce clause constraints on state tax incentives for business. Harvard Law Review, 110(2), 377–468.

    Article  Google Scholar 

  • Fehrenbacher, K. (2012). 10 Reasons Apple, Facebook & Google Chose North Carolina for Their Mega Data Centers.Gigaom, July 10, 2012. Available online:http://gigaom.com/2012/07/10/10-reasons-apple-facebook-google-chose-north-carolina-for-their-mega-data-centers/.

  • Fisher, P. S., & Alan H. P. (1998). State and Local Incentive Competition for New Investment. In: Industrial Incentives: Competition among American States and Cities. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research, 1–30.

  • Fox, W. F., & Murray, M. N. (2004). Do economic effects justify the use of fiscal incentives? Southern Economic Journal, 71(1), 78–92.

    Article  Google Scholar 

  • GAO—United States General Accounting Office. (1988). Enterprise Zones: Lessons from the Maryland Experience. Report to Congressional Requesters, Program Evaluation and Methodology Division, B-205687.

  • García-Quevedo, J. (2004). Do Public subsidies complement business R&D? A meta-analysis of the econometric evidence. Kyklos, 57(1), 87–102.

    Article  Google Scholar 

  • Gates, D. (2014). Boeing picks Everett for building wing of 777X.Seattle Times,February 16. Available online: http://seattletimes.com/html/businesstechnology/2022927801_boeing777xwingxml.html.

  • Gobillon, L., Magnac, T., & Selod, H. (2012). Do Unemployed Workers Benefit from Enterprise Zones? The French Experience. CEPR Discussion Paper No. DP8084. Available online: http://ssrn.com/abstract=1714856.

  • Goozner, M. (1989). Sears Picks Hoffman Estates. Chicago Tribune, June 26. Available online: http://articles.chicagotribune.com/1989-06-26/news/8902120643_1_sears-restructuring-sears-chairman-edward-brennan-sears-spokesman.

  • Ham, J. C., Swenson, C., İmrohoroğlu, A., & Song, H. (2011). Government programs can improve local labor markets: Evidence from state enterprise zones, federal empowerment zones and federal enterprise communities. Journal of Public Economics, 95(7/8), 779–797.

    Article  Google Scholar 

  • Hanson, A. (2009). Local employment, poverty and property-value effects of geographically-targeted tax incentives: An instrumental variable approach. Regional Science and Urban Economics, 39(6), 721–731.

    Article  Google Scholar 

  • Hayek, F. A. (1945). The use of knowledge in society. American Economic Review, 35(4), 519–530.

    Google Scholar 

  • Hayek, F. A. (1960). The constitution of liberty. Chicago: Chicago University Press.

    Google Scholar 

  • Hoff, T. J. B. (1981). Economic calculation in the socialist society. Indianapolis: Liberty Fund, Inc.

    Google Scholar 

  • Holcombe, R. G. (1998). Entrepreneurship and economic growth. Quarterly Journal of Austrian Economics, 1(2), 45–62.

    Article  Google Scholar 

  • Holcombe, R. G. (2004). The new urbanism versus the market process. The Review of Austrian Economics, 17(2–3), 285–300.

    Article  Google Scholar 

  • Holcombe, R. G. (2013). Crony capitalism: By-product of big government. The Independent Review: A Journal of Political Economy, 17(4), 541–559.

    Google Scholar 

  • Horwitz, S. (1996). Money, money prices, and the socialist calculation debate. Advances in Austrian Economics, 3, 59–77.

    Article  Google Scholar 

  • Horwitz, S. (1998). Monetary calculation and Mises’ critique of planning. History of Political Economy, 30(3), 427–450.

    Article  Google Scholar 

  • Ikeda, S. (2004). Urban interventionism and local knowledge. The Review of Austrian Economics, 17(2–3), 247–264.

    Article  Google Scholar 

  • Ikeda, S., & Staley, S. (2004). Introductory essay for a symposium on ‘urban interventionism’. The Review of Austrian Economics, 17(2–3), 151–154.

    Article  Google Scholar 

  • Jia, P. (2008). What happens when wal-mart comes to town: An empirical analysis of the discount retailing industry. Econometrica, 76(6), 1263–1316.

    Article  Google Scholar 

  • Kenney, M., & Florida, R. (1991). How Japanese industry is rebuilding the rust belt. Technology Review, 94(2), 24–33.

    Google Scholar 

  • Kenyon, D. A., Langley, A. H., & Paquin, B. P. (2012). Rethinking Property Tax Incentives for Business. Lincoln Institute of Land Policy. Available online: www.lincolninst.edu.

  • Kronick, R., & Gilmer, T. (2002). Insuring low-income adults: Does public coverage crowd out private? Health Affairs, 21(1), 225–239.

    Article  Google Scholar 

  • Krugman, P. (1991). Geography and Trade, MIT Press.

  • Krugman, P. (1993). The Current Case for Industrial Policy. Ch. 7 in. Protectionism and World Welfare (Salvatore, D. ed.), Cambridge University Press.

  • Laffont, J., & Tirole, J. (1991). The politics of government decision-making: A theory of regulatory capture. Quarterly Journal of Economics, 106(4), 1089–1127.

    Article  Google Scholar 

  • Lavoie, D. (1985a). Rivalry and central planning: The socialist calculation debate reconsidered. New York: Cambridge University Press.

    Google Scholar 

  • Lavoie, D. (1985b). National economic planning: What Is left? Massachusetts: Ballinger Publishing Company.

    Google Scholar 

  • Leaver, C. (2009). Bureaucratic minimal squawk behavior: Theory and evidence from regulatory agencies. American Economic Review, 99(3), 572–607.

    Article  Google Scholar 

  • Leeson, P. T., & Subrick, J. R. (2006). Robust political economy. The Review of Austrian Economics, 19, 107–111.

    Article  Google Scholar 

  • LeRoy, G. (2005). The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation, Berett-Koehler Publishers, Inc.

  • Levy, D. (2002). Robust institutions. The Review of Austrian Economics, 15, 131–142.

    Article  Google Scholar 

  • Los Angeles Times, (1998). Subsidy Deal Persuades NYSE to Stay in N.Y. December 23. Available online: http://articles.latimes.com/1998/dec/23/business/fi-56756.

  • Luther, W. (2010). Movie Production Incentives: Blockbuster Support for Lackluster Policy. Special Report for the Tax Foundation No. 173, January 2010.

  • Lynch, D., & Zax, J. S. (2011). Incidence and substitution in enterprise zone programs: The case of Colorado. Public Finance Review, 39(2), 226–255.

    Article  Google Scholar 

  • Mattera, P., Tarczynska K., & LeRoy G. (2013). Megadeals: The Largest Economic Development Subsidy Packages Ever Awarded by State and Local Governments in the United States. Report for Good Jobs First. Available online: http://www.goodjobsfirst.org/megadeals.

  • Mazumdar, S. (2008). Crony Capitalism and India: Before and After Liberalization. Institute for Studies in Industrial Development Working paper No.2008/04 Available online: http://mpra.ub.uni-muenchen.de/19627/.

  • McArdle, J. (2011). Solyndra Spent Liberally to Woo Lawmakers Until the End, Records Show. New York Times, September 16. Available Online: http://www.nytimes.com/gwire/2011/09/16/16greenwire-solyndra-spent-liberally-to-woo-lawmakers-unti-81006.html.

  • McChesney, F. S. (1987). Rent extraction and rent creation in the economic theory of regulation. Journal of Legal Studies, 16(1), 101–118.

    Article  Google Scholar 

  • McCourt, J., & LeRoy, G. (2003). A Better Deal for Illinois: Improving Economic Development Policy. Good Jobs First. Available online: http://www.goodjobsfirst.org/sites/default/files/docs/pdf/il.pdf.

  • McNamee, M. (1995). A Torrent Of Tax Breaks, Bloomberg Businessweek, October 1. Available online: http://www.businessweek.com/stories/1995-10-01/a-torrent-of-tax-breaks.

  • Milward, B. H., & Newman, H. H. (1989). State incentive packages and the industrial location decision. Economic Development Quarterly, 3, 203.

    Article  Google Scholar 

  • Milyo, J. (2013). Corporate Influence and Political Corruption: Lessons from Stock Market Reactions to Political Events.Independent Review, forthcoming.

  • Mises, L. (1920). Economic calculation in the socialist Commonwealth. In F. A. Hayek (Ed.), Collectivist economic planning (pp. 87–130). London: George Routledge & Sons.

    Google Scholar 

  • Mises, L. (1949). 1996. Human action (4th ed.). San Francisco: Fox & Wilkes.

    Google Scholar 

  • Mises, L. (1977). A critique of interventionism. USA: Arlington House Publishers.

    Google Scholar 

  • Mitchell, M. (2012). The Pathology of Privilege: The Economic Consequences of Government Favoritism. Mercatus Research. Available online:http://mercatus.org/publication/pathology-privilege-economic-consequences-government-favoritism

  • Myerson, A. R. (1996). O Governor, Won’t You Buy Me a Mercedes Plant? New York Times, September 1. Available Online: http://www.nytimes.com/1996/09/01/business/o-governor-won-t-you-buy-me-a-mercedes-plant.html?pagewanted=all&src=pm.

  • Nader, R. (2001). Letter to Mayor Rudolph Giuliani, February 12, Washington, DC. Available online: http://www.essentialinformation.org/nysesubsidydeal.html.

  • New York Times, (2014). United States of Subsidies: A Series Examining Business Incentives and Their Impact on Jobs and Local Economies. Available online: http://www.nytimes.com/interactive/2012/12/01/us/government-incentives.html?_r=0.

  • O’Connor, J. (2011). Illinois Gov. Signs Tax Breaks for Sears, CME. Associated Press, December 16. Available online: http://www.businessweek.com/ap/financialnews/D9RLTCJ80.htm.

  • O’Keefe, S. (2004). Job creation in california’s enterprise zones: A comparison utilizing a propensity score matching model. Journal of Urban Economics, 55(1), 131–150.

    Article  Google Scholar 

  • News & Observer, (2007).What the State, Local Deals Say. February 11. Available online:http://www2.nccommerce.com/eclipsfiles/16048.pdf.

  • Office of the Governor, State of Louisiana, (2011). Gov. Jindal and Cheniere Energy CEO Announce $6 Billion Natural Gas Liquifaction Facility in Louisiana. July 19. Available online: http://www.gov.louisiana.gov/index.cfm?md=newsroom&tmp=detail&articleID=2928.

  • Papke, L. E. (1994). Tax policy and urban development: Evidence from the Indiana enterprise zone program. Journal of Public Economics, 54, 37–49.

    Article  Google Scholar 

  • Parrott, J. A. (2001). New York Stock Exchange Subsidy Deal. Testimony at the Public Hearing of the Empire State Development Corporation on the New York Stock Exchange Project Held Pursuant to the Eminent Domain Procedure Law, Alexander Hamilton United States Customs House, January 8. Available online:http://fiscalpolicy.org/new-york-stock-exchange-subsidy-deal-2.

  • Pennington, M. (2004). Citizen participation, the knowledge problem and urban land use planning: An Austrian perspective on institutional choice. The Review of Austrian Economics, 17(2–3), 213–231.

    Article  Google Scholar 

  • Pennington, M. (2013). Robust political economy. Northampton: Edward Elgar Publishing, Ltd.

    Google Scholar 

  • Peters, A., & Fisher, F. (2004). The failures of economic development incentives. Journal of the American Planning Association, 70(1), 27–37.

    Article  Google Scholar 

  • Pew Centre on the States, (2012). Evidence Counts: Evaluating State TaxIncentives for Jobs and Growth.Available Online:http://www.pewstates.org/research/reports/evidence-counts-85899378806.

  • Phelps, E. (2013). Mass flourishing. New Jersey: Princeton University Press.

    Google Scholar 

  • Porter, M. E. (2000). “Location, competition, and economic development: Local clusters in a global economy”. Economic development quarterly, 14(1), 15–34.

    Article  Google Scholar 

  • Ramsey, F. (1927). A contribution to the theory of taxation. Economic Journal, 37, 47–61.

    Article  Google Scholar 

  • Rosenstein-Rodan, P. N. (1943). Problems of industrialization of Eastern and South-Eastern Europe. Economic Journal, 53(210/211), 202–211.

    Article  Google Scholar 

  • Seshadri, T., & Storr, V. H. (2010). Knowledge problems associated with creating export zones. The Review of Austrian Economics, 23(4), 347–366.

    Article  Google Scholar 

  • Sowell, T. (1980). Knowledge and decisions. New York: Basic Books.

    Google Scholar 

  • Staley, S. R. (2004). Urban planning, smart growth, and economic calculation: An Austrian critique and extension. The Review of Austrian Economics, 17(2–3), 265–283.

    Article  Google Scholar 

  • Stark, K. J., & Wilson, D. J. (2006). What do we know about the interstate economic effects of state tax incentives? Georgetown Journal of Law and Public Policy, 4(4), 133–164.

    Google Scholar 

  • Story, L. (2012). Lines Blur as Texas Gives Industries a Bonanza. New York Times, December 2. Available online: http://www.nytimes.com/2012/12/03/us/winners-and-losers-in-texas.html?pagewanted=all.

  • Studwell, J. (2013). How Asia Works: Success and Failure in the World’s Most Dynamic Region, Grove Press

  • Summers, A. B., & Chawla A. (2013). “Tax Credits in California: Economic Growth Engine or Wasteful Corporate Welfare?”Reason Foundation Policy Study 412.

  • Taylor, M. (1993). A proposal to prohibit industrial relocation subsidies. Texas Law Review, 72, 669–713.

    Google Scholar 

  • Thaler, R. H. (1992).The Winner’s Curse: Paradoxes and Anomalies of Economic Life, Princeton University Press

  • Thomas, K. (2011). Investment incentives and the global competition for capital. NewYork: Palgrave Macmillan.

    Google Scholar 

  • Thomsen, E. F. (1992). Prices and knowledge: A market-process perspective. New York: Routledge.

    Book  Google Scholar 

  • Tomsho, R. (1995). Growing Pains: Rio Rancho Wooed Industry and Got It, Plus Financial Woes.Wall Street Journal, April 11.

  • Vidal, J. B., Draca, M., & Fons-Rosen, C. (2012). Revolving door lobbyists. American Economic Review, 102(7), 3731–3748.

    Article  Google Scholar 

  • Wade, R. (1990). Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, Princeton University Press

  • Wagner, J. E., & Deller, S. C. (1998). Measuring the effects of economic diversity on growth and stability. Land Economics, 74(4), 541–556.

    Article  Google Scholar 

  • Wallis, J. J. (2006). The Concept of Systematic Corruption in American History. In: Corruption and Reform: Lessons from America’s Economic History (Glaeser, E. L., & Goldin, C. eds.), University of Chicago Press.

  • Wilder, M. G., & Rubin, B. M. (1996). Rhetoric versus reality: A review of studies on state enterprise zone programs. Journal of the American Planning Association, 62(4), 473–491.

    Article  Google Scholar 

  • Wilson, R. (2013). Washington Just Awarded the Largest State Tax Subsidy in U.S. history. Washington Post, November 12. Available online: http://www.washingtonpost.com/blogs/govbeat/wp/2013/11/12/washington-just-awarded-the-largest-state-tax-subsidy-in-u-s-history/.

  • Zingales, L. (2012). A capitalism for the people: Recapturing the lost genius of American prosperity. New York: Basic Books.

    Google Scholar 

Download references

Author information

Authors and Affiliations

  1. Department of Economics, George Mason University, MS 3G4, Fairfax, VA, 22030, USA

    Christopher J. Coyne & Lotta Moberg

Authors
  1. Christopher J. Coyne
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Lotta Moberg
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Lotta Moberg.

Rights and permissions

Reprints and permissions

About this article

Check for updates. Verify currency and authenticity via CrossMark

Cite this article

Coyne, C.J., Moberg, L. The political economy of state-provided targeted benefits. Rev Austrian Econ 28, 337–356 (2015). https://doi.org/10.1007/s11138-014-0274-8

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11138-014-0274-8

Keywords

JEL classification

Search

Navigation