How Critical are State Incentives?

While many states dole out incentives intended to boost their appeal to business, recent research raises questions about their effectiveness.

In fact, of the five states that a report from W.E. Upjohn Institute for Employment Research identified as offering the highest levels of business incentives, only one—Tennessee—ranked among our top 10 Best States for Business. Two—New Jersey at No. 47 and New York at No. 49—languished at the very bottom, while the others, New Mexico and Louisiana, were at No. 30 and No. 33, respectively.

Site-selection experts, however, still say incentives are important, particularly for states that need to offset issues like onerous regulation. Mark Sweeney, senior principal with McCallum Sweeney Consulting in Greenville, South Carolina, asserts that incentives can be “critical” at the end of a site-selection decision and can help states mitigate disadvantages like high property taxes. In his view, cash grants are the most effective incentive because they are typically flexible.

“There aren’t any blank checks but [cash grants] can really get on the company’s side of the table for land purchase, preparation and building,” Sweeney says. To boost effectiveness, states may need to look harder at what kind of incentives to offer, how they should be structured and what sectors to target.

The W.E. Upjohn Institute report found that job creation incentives and property tax cuts comprised 70 percent of all incentives used. Yet job training programs may generate better and longer-lasting employment boots than property tax abatements, reports Timothy Bartik, senior economist for the W.E. Upjohn Institute for Employment Research, who also notes that it can often make more sense for states to target incentives at more high-tech and high-wage businesses, which will be more likely to offer residents desirable jobs, and to frontload incentives.

In competing for the attention of businesses, states are starting to look harder at what incentives cost and how effective they are with an eye toward identifying the programs that produce the strongest returns, says Bartik.

“I think we’re entering a new era of transparency and accountability in incentive policy,” he notes. “We should expect that there will be more publicity on what incentives are given and more demands for results and evaluation.”