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Study: Incentive benefits outweigh costs, but can harm low-income groups
tags: incentives
Eli Dile   on Friday, March 30, 2018 at 12:00:00 am

New research from Tim Bartik of the W.E. Upjohn Institute provides a cost-benefit analysis of the typical economic development incentive deal. Using a simulation model that measures wage growth played out over 80 years, Bartik finds that incentives do in fact lead to job creation through a modest multiplier effect, but they do not pay for themselves. Instead, local governments often make cuts to services that have disproportionate impacts on low-income residents. The report finds that:

The typical incentive package in the typical state has benefits and costs of almost the same size. Jobs are created, but only in a minority of incented firms. Of the jobs created, only a modest proportion increase the employment of local residents. Financing incentives by cutting education spending has large costs, because it reduces future wages. Cuts in education spending have particularly large costs for low-income groups.

To resolve long-term detriments, Bartik makes three recommendations.

  1. Place budget caps on incentives so services will not be cut in response to shortfalls.

  2. Target only high-multiplier industries in traded sectors.

  3. Prioritize customized services to local small businesses over cash rewards to out-of-state companies.

Shared here is the full report and policy brief.

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