We recently wrote that tax credits are losing their luster as economic development incentives because the costs are often higher and more variable than anticipated. Now research indicates that statutory tax credits may not have a meaningful impact on business behavior either.
In a research note published in Economic Development Quarterly, the authors found that statutory tax credits in North Carolina had a limited influence on investment behavior and did not substantially affect perceptions of the state’s business climate. Adding insult to injury, 30% of executives from companies that received a tax credit said they were unaware of that fact.
It is important to note that statutory incentives are available to any eligible business meeting the law’s requirements. By contrast, discretionary incentives are negotiated and awarded on a case-by-case basis.
The authors conclude:
This survey raises important questions about the limitations of state tax credits in influencing company behavior. It suggests that states may benefit from taking a more deliberate approach to awarding economic development incentives rather than using statutory tax credits to promote economic development activities.
The abstract is presented below and the full article is accessible here.
Executive surveys ranking business climate factors have become commonplace in site selection publications. However, these rankings rarely examine if the surveyed firms are receiving economic development incentives and whether or not these incentives influence business climate perceptions. This research note examines the differences in business climate perceptions in North Carolina between executives in companies receiving tax credits for business investment and job creation activities and executives in companies not receiving tax credits. Both groups rank the availability of skilled labor as the primary factor influencing business climate. In addition, executives in both groups prefer overall tax reductions rather than select tax incentives to improve the state’s economy. Contrary to the belief among many economic development practitioners that tax credits are a motivating factor for firms to engage in economic development, only 30% of executives in incented companies were aware that their company had received a state economic development tax credit.