The new book Making Sense of Incentives. Taming Business Incentives to Promote Prosperity from Tim Bartik at the W.E. Upjohn Institute for Employment Research is a recommended read for policy leaders and economic development practitioners. A free PDF version of the book is available to download from the Upjohn website. 

The book emphasizes state-level incentives designed to induce job creation. Bartik focuses his analysis specifically on “how the level and distribution of state residents’ per capita incomes are affected” by incentives (17). He concludes with options for improving incentive use in the US.

Below is an excerpt from the book addressing suggested principles for incentive use: 

For both economic and political reasons, a state’s incentive program should be guided by the following principles:

Target firms in tradable industries in distressed areas and firms in high-tech tradable industries in a few high-tech cluster areas. 

Incentives should not go to locally oriented firms that compete with other firms in the same state, but rather to firms in tradable industries, which compete in national or international markets. As described in Chapter 4, state residents benefit far more from incentive programs that target distressed areas or high-tech industries in areas that already have a significant high-tech cluster. New jobs in distressed areas, with an ample supply of workers lacking jobs, will be more likely to go to state residents. The expansion of high-tech firms in an area with a significantly above-average high-tech cluster will have higher job multiplier effects that will create more jobs in local suppliers and retailers. As noted previously, such high-tech cluster communities comprise about 60 or so of the roughly 700 local labor markets in the U.S. Do not confuse high-tech aspirations with current realities!

Emphasize customized business services more, business tax incentives less. 

Customized business services have more job creation effects per dollar than business tax incentives (see Chapter 3 and 4). The political demand for customized business services is more limited, compared to business tax incentives. All businesses will always demand more business tax incentives or other cash, even if the incentives do not alter business’s decisions about job creation. Customized business services only benefit a more limited number of mostly smaller businesses that need such services, and are only demanded if the services have some usefulness.  

Structure incentives to limit the temptation to provide excessive long-term incentives to large corporations.

Up-front incentives have a higher benefit-cost ratio (see Chapter 4). If the state’s rule is that the term of incentives must be limited, governors will be less tempted to strike deals that are excessive, as they will have to immediately deal with incentives’ budget costs. Mega-deals with large corporations are politically tempting for governors because of the publicity. But incentives for smaller businesses can be at least as effective at actually creating jobs. 

Finance incentives by higher business taxes, not by cutting public spending that promotes economic development.

Incentive design and budgeting procedure should minimize the risk that incentives reduce spending on programs that promote economic development, such as public schools. Ideally, a state’s choice to devote more resources to incentives should be paid for by increasing the state’s business tax rate, which exports some of the costs to nonresidents.

For more information, please see: Bartik, Timothy J. 2019. Making Sense of Incentives: Taming Business Incentives to Promote Prosperity. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research.

This work is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 4.0 License.