Do high-unemployment states offer the biggest business incentives? Results for eight states using the "hypothetical firm" method

Economic Development Quarterly

Volumn 11, Issue 2, 1997, Pages 107-122

  Peters, Alan H ^a   Fisher, Peter S ^a  

^a NONE

Author keywords

[No Author keywords available]

Indexed keywords

EID: 0031490357     PISSN: 08912424     EISSN: None     Source Type: Journal    
DOI: 10.1177/089124249701100201     Document Type: Article

References (55)

1. Thomas McCraw, "Mercantilism and the Market: Antecedents of American Industrial Policy," in The Politics of Industrial Policy, ed. Claude Barfield and William Schambra (Washington, DC: American Enterprise Institute for Public Policy Research, 1986), pp. 33-62.
2. Peter Eisinger, The Rise of the Entrepreneurial State (Madison: University of Wisconsin Press, 1988).
3. Michael Wasylenko, "The Location of Firms: The Role of Taxes and Fiscal Incentives," in Urban Government Finance, ed. Roy Bahl (Beverly Hills, CA: Sage, 1981), pp. 155-90.
4. John Blair and Robert Premus, "Major Factors in Industrial Location," Economic Development Quarterly 1 (1987): 72-85; and Keith Chapman and David Walker, Industrial Location (Oxford, UK: Basil Blackwell, 1990).
5. John Blair and Robert Premus, "Major Factors in Industrial Location," Economic Development Quarterly 1 (1987): 72-85; and Keith Chapman and David Walker, Industrial Location (Oxford, UK: Basil Blackwell, 1990).
6. This is the central "positive" justification for economic development policy. It is true that there are a number of other important justifications. See Michael Kieschnick, Taxes and Growth: Business Incentives and Economic Development (Washington, DC: Council of State Planning Agencies, 1991).
7. Stephan Marston, "Two Views of the Geographic Distribution of Unemployment," Quarterly Journal of Economics 100 (February 1985): 57-79; and Norman Foster, David Forkenbrock, and Thomas Pogue, "Evaluation of a State-Level Road Program to Promote Local Economic Development," Transportation Quarterly 45 (1991): 143-57.
8. Stephan Marston, "Two Views of the Geographic Distribution of Unemployment," Quarterly Journal of Economics 100 (February 1985): 57-79; and Norman Foster, David Forkenbrock, and Thomas Pogue, "Evaluation of a State-Level Road Program to Promote Local Economic Development," Transportation Quarterly 45 (1991): 143-57.
9. John Logan and Harvey Molotch, Urban Fortunes: The Political Economy of Place (Berkeley: University of California Press, 1987).
10. Ibid.
11. Barry Rubin and Kurt Zorn, "Sensible State and Local Economic Development," Public Administration Review 45 (1985): 333-39.
12. Timothy Bartik, Who Benefits from State and Local Economic Development Policies? (Kalamazoo, MI: Upjohn Institute for Employment Research, 1991).
13. Robert Guskind, "The Giveaway Game Continues," Planning 55 (1990): 4-8.
14. Russell Hanson, "Bidding for Business: A Second War between the States?" Economic Development Quarterly 7 (1993): 183-98.
15. R. Scott Fosler, The New Economic Role of American States: Strategies in a Competitive World Economy (New York: Oxford University Press, 1988).
16. Eisinger, Rise of the Entrepreneurial State.
17. Susan Fainstein, "Promoting Economic Growth: Urban Planning in the United States and Great Britain," Journal of the American Planning Association 22 (1991): 22-33.
18. Marianne Clarke, Revitalizing State Economies (Washington, DC: National Governors' Association, 1986).
19. Michael Luger, "The States and Industrial Development: Program Mix and Policy Effectiveness," in Perspectives on State and Local Finance and Public Policy, ed. John Quigley (Greenwich, CT: JAI, 1986), pp. 29-63.
20. Virginia Gray and David Lowery, "The Corporatist Foundations of State Industrial Policy," Social Science Quarterly 71 (1990): 3-22.
21. James Clingermayer and Richard Feiock, "The Adoption of Economic Development Policies by Large Cities: A Test of Economic, Interest Group, and Institutional Explanations," Policy Studies Journal 18 (1990): 539-52.
22. Gary Green and Arnold Fleischmann, "Promoting Economic Development: A Comparison of Central Cities, Suburbs and Nonmetropolitan Communities," Urban Affairs Quarterly 27 (1991): 145-54.
23. Ann Bowman, Tools and Targets: The Mechanics of City Economic Development, Research Report on America's Cities (Washington, DC: National League of Cities, 1987); Irene Rubin and Herbert Rubin, "Economic Development Incentives: The Poor (Cities) Pay More," Urban Affairs Quarterly 23 (1987): 37-62; Richard Feiock and James Clingermayer, "Municipal Representation, Executive Power and Economic Development Adoption," Policy Studies Journal 15 (1986): 211-30; Elaine Sharp, "The Politics and the Economics of the New City Debt," American Political Science Review 80 (1986): 1271-88; Todd Swanstrom, The Crisis of Growth Politics: Cleveland, Kucinich, and the Challenge of Urban Populism (Philadelphia: Temple University Press, 1985); Ken Young and Charlie Mason, Urban Economic Development: New Roles and Relationships (London: Macmillan, 1983); and Susan Hanson, "State Industrial Policy" (Paper presented at the annual meeting of the Southwest Political Science Association, Houston, Texas, March 1985).
24. Ann Bowman, Tools and Targets: The Mechanics of City Economic Development, Research Report on America's Cities (Washington, DC: National League of Cities, 1987); Irene Rubin and Herbert Rubin, "Economic Development Incentives: The Poor (Cities) Pay More," Urban Affairs Quarterly 23 (1987): 37-62; Richard Feiock and James Clingermayer, "Municipal Representation, Executive Power and Economic Development Adoption," Policy Studies Journal 15 (1986): 211-30; Elaine Sharp, "The Politics and the Economics of the New City Debt," American Political Science Review 80 (1986): 1271-88; Todd Swanstrom, The Crisis of Growth Politics: Cleveland, Kucinich, and the Challenge of Urban Populism (Philadelphia: Temple University Press, 1985); Ken Young and Charlie Mason, Urban Economic Development: New Roles and Relationships (London: Macmillan, 1983); and Susan Hanson, "State Industrial Policy" (Paper presented at the annual meeting of the Southwest Political Science Association, Houston, Texas, March 1985).
25. Ann Bowman, Tools and Targets: The Mechanics of City Economic Development, Research Report on America's Cities (Washington, DC: National League of Cities, 1987); Irene Rubin and Herbert Rubin, "Economic Development Incentives: The Poor (Cities) Pay More," Urban Affairs Quarterly 23 (1987): 37-62; Richard Feiock and James Clingermayer, "Municipal Representation, Executive Power and Economic Development Adoption," Policy Studies Journal 15 (1986): 211-30; Elaine Sharp, "The Politics and the Economics of the New City Debt," American Political Science Review 80 (1986): 1271-88; Todd Swanstrom, The Crisis of Growth Politics: Cleveland, Kucinich, and the Challenge of Urban Populism (Philadelphia: Temple University Press, 1985); Ken Young and Charlie Mason, Urban Economic Development: New Roles and Relationships (London: Macmillan, 1983); and Susan Hanson, "State Industrial Policy" (Paper presented at the annual meeting of the Southwest Political Science Association, Houston, Texas, March 1985).
26. Ann Bowman, Tools and Targets: The Mechanics of City Economic Development, Research Report on America's Cities (Washington, DC: National League of Cities, 1987); Irene Rubin and Herbert Rubin, "Economic Development Incentives: The Poor (Cities) Pay More," Urban Affairs Quarterly 23 (1987): 37-62; Richard Feiock and James Clingermayer, "Municipal Representation, Executive Power and Economic Development Adoption," Policy Studies Journal 15 (1986): 211-30; Elaine Sharp, "The Politics and the Economics of the New City Debt," American Political Science Review 80 (1986): 1271-88; Todd Swanstrom, The Crisis of Growth Politics: Cleveland, Kucinich, and the Challenge of Urban Populism (Philadelphia: Temple University Press, 1985); Ken Young and Charlie Mason, Urban Economic Development: New Roles and Relationships (London: Macmillan, 1983); and Susan Hanson, "State Industrial Policy" (Paper presented at the annual meeting of the Southwest Political Science Association, Houston, Texas, March 1985).
27. Ann Bowman, Tools and Targets: The Mechanics of City Economic Development, Research Report on America's Cities (Washington, DC: National League of Cities, 1987); Irene Rubin and Herbert Rubin, "Economic Development Incentives: The Poor (Cities) Pay More," Urban Affairs Quarterly 23 (1987): 37-62; Richard Feiock and James Clingermayer, "Municipal Representation, Executive Power and Economic Development Adoption," Policy Studies Journal 15 (1986): 211-30; Elaine Sharp, "The Politics and the Economics of the New City Debt," American Political Science Review 80 (1986): 1271-88; Todd Swanstrom, The Crisis of Growth Politics: Cleveland, Kucinich, and the Challenge of Urban Populism (Philadelphia: Temple University Press, 1985); Ken Young and Charlie Mason, Urban Economic Development: New Roles and Relationships (London: Macmillan, 1983); and Susan Hanson, "State Industrial Policy" (Paper presented at the annual meeting of the Southwest Political Science Association, Houston, Texas, March 1985).
28. Ann Bowman, Tools and Targets: The Mechanics of City Economic Development, Research Report on America's Cities (Washington, DC: National League of Cities, 1987); Irene Rubin and Herbert Rubin, "Economic Development Incentives: The Poor (Cities) Pay More," Urban Affairs Quarterly 23 (1987): 37-62; Richard Feiock and James Clingermayer, "Municipal Representation, Executive Power and Economic Development Adoption," Policy Studies Journal 15 (1986): 211-30; Elaine Sharp, "The Politics and the Economics of the New City Debt," American Political Science Review 80 (1986): 1271-88; Todd Swanstrom, The Crisis of Growth Politics: Cleveland, Kucinich, and the Challenge of Urban Populism (Philadelphia: Temple University Press, 1985); Ken Young and Charlie Mason, Urban Economic Development: New Roles and Relationships (London: Macmillan, 1983); and Susan Hanson, "State Industrial Policy" (Paper presented at the annual meeting of the Southwest Political Science Association, Houston, Texas, March 1985).
29. Ann Bowman, Tools and Targets: The Mechanics of City Economic Development, Research Report on America's Cities (Washington, DC: National League of Cities, 1987); Irene Rubin and Herbert Rubin, "Economic Development Incentives: The Poor (Cities) Pay More," Urban Affairs Quarterly 23 (1987): 37-62; Richard Feiock and James Clingermayer, "Municipal Representation, Executive Power and Economic Development Adoption," Policy Studies Journal 15 (1986): 211-30; Elaine Sharp, "The Politics and the Economics of the New City Debt," American Political Science Review 80 (1986): 1271-88; Todd Swanstrom, The Crisis of Growth Politics: Cleveland, Kucinich, and the Challenge of Urban Populism (Philadelphia: Temple University Press, 1985); Ken Young and Charlie Mason, Urban Economic Development: New Roles and Relationships (London: Macmillan, 1983); and Susan Hanson, "State Industrial Policy" (Paper presented at the annual meeting of the Southwest Political Science Association, Houston, Texas, March 1985).
30. Robert Atkinson, "Some States Take the Lead: Explaining the Formation of State Technology Policies," Economic Development Quarterly 5 (1991): 33-44.
31. Dennis Grady, "State Economic Development Incentives: Why Do States Compete?" State and Local Government Review 19 (1987): 86-94.
32. R. Hanson, "Bidding for Business."
33. Allen Brierly, "State Economic Development Policy Choices" (Paper presented at the annual meeting of the Southwest Political Science Association, Houston, Texas, March 1986); and Laura Reese, "Municipal Fiscal Health and Tax Abatement Policy," Economic Development Quarterly 5 (1991): 23-32.
34. Allen Brierly, "State Economic Development Policy Choices" (Paper presented at the annual meeting of the Southwest Political Science Association, Houston, Texas, March 1986); and Laura Reese, "Municipal Fiscal Health and Tax Abatement Policy," Economic Development Quarterly 5 (1991): 23-32.
35. Richard Feiock, "The Adoption of Economic Development Policies by State and Local Governments: A Review," Economic Development Quarterly 3 (1989): 266-70.
36. Peter Fisher and Alan Peters, "Industrial Incentives" (Final report, Upjohn Institute for Employment Research, 1995).
37. These include small-issue industrial revenue bond financing, most community development block grant-financed infrastructural improvements, the various Economic Development Administration programs, and Job Training Partnership Act funds.
38. Fisher and Peters, "Industrial Incentives."
39. James Papke and Leslie Papke, "Measuring Differential State and Local Tax Liabilities and Their Implications for Business Investment Location," National Tax Journal 39 (1986): 357-66; Leslie Papke, "Subnational Taxation and Capital Mobility: Estimates of Tax-Price Elasticities," National Tax Journal 40 (1987): 191-203; Leslie Papke, "The Responsiveness of Industrial Activity to Interstate Tax Differentials: A Comparison of Elasticities," in Industrial Location and Public Policy, ed. Henry Herzog and Alan Schlottmann (Knoxville: University of Tennessee Press, 1991), pp. 120-36; Timothy Hunt, Michigan's Business Tax Costs Relative to the Other Great Lakes States (Kalamazoo, MI: Upjohn Institute for Employment Research, 1985); Wisconsin Department of Revenue, Corporate Tax Climate: A Comparison of Nineteen States (Madison: Wisconsin Department of Revenue, 1989); and Indiana Economic Development Council, An Assessment of Indiana's Competitive Position in Business Recruitment (Indianapolis: Indiana Economic Development Council, 1993). Earlier work is discussed in Kieschnick, Taxes and Growth.
40. James Papke and Leslie Papke, "Measuring Differential State and Local Tax Liabilities and Their Implications for Business Investment Location," National Tax Journal 39 (1986): 357-66; Leslie Papke, "Subnational Taxation and Capital Mobility: Estimates of Tax-Price Elasticities," National Tax Journal 40 (1987): 191-203; Leslie Papke, "The Responsiveness of Industrial Activity to Interstate Tax Differentials: A Comparison of Elasticities," in Industrial Location and Public Policy, ed. Henry Herzog and Alan Schlottmann (Knoxville: University of Tennessee Press, 1991), pp. 120-36; Timothy Hunt, Michigan's Business Tax Costs Relative to the Other Great Lakes States (Kalamazoo, MI: Upjohn Institute for Employment Research, 1985); Wisconsin Department of Revenue, Corporate Tax Climate: A Comparison of Nineteen States (Madison: Wisconsin Department of Revenue, 1989); and Indiana Economic Development Council, An Assessment of Indiana's Competitive Position in Business Recruitment (Indianapolis: Indiana Economic Development Council, 1993). Earlier work is discussed in Kieschnick, Taxes and Growth.
41. James Papke and Leslie Papke, "Measuring Differential State and Local Tax Liabilities and Their Implications for Business Investment Location," National Tax Journal 39 (1986): 357-66; Leslie Papke, "Subnational Taxation and Capital Mobility: Estimates of Tax-Price Elasticities," National Tax Journal 40 (1987): 191-203; Leslie Papke, "The Responsiveness of Industrial Activity to Interstate Tax Differentials: A Comparison of Elasticities," in Industrial Location and Public Policy, ed. Henry Herzog and Alan Schlottmann (Knoxville: University of Tennessee Press, 1991), pp. 120-36; Timothy Hunt, Michigan's Business Tax Costs Relative to the Other Great Lakes States (Kalamazoo, MI: Upjohn Institute for Employment Research, 1985); Wisconsin Department of Revenue, Corporate Tax Climate: A Comparison of Nineteen States (Madison: Wisconsin Department of Revenue, 1989); and Indiana Economic Development Council, An Assessment of Indiana's Competitive Position in Business Recruitment (Indianapolis: Indiana Economic Development Council, 1993). Earlier work is discussed in Kieschnick, Taxes and Growth.
42. James Papke and Leslie Papke, "Measuring Differential State and Local Tax Liabilities and Their Implications for Business Investment Location," National Tax Journal 39 (1986): 357-66; Leslie Papke, "Subnational Taxation and Capital Mobility: Estimates of Tax-Price Elasticities," National Tax Journal 40 (1987): 191-203; Leslie Papke, "The Responsiveness of Industrial Activity to Interstate Tax Differentials: A Comparison of Elasticities," in Industrial Location and Public Policy, ed. Henry Herzog and Alan Schlottmann (Knoxville: University of Tennessee Press, 1991), pp. 120-36; Timothy Hunt, Michigan's Business Tax Costs Relative to the Other Great Lakes States (Kalamazoo, MI: Upjohn Institute for Employment Research, 1985); Wisconsin Department of Revenue, Corporate Tax Climate: A Comparison of Nineteen States (Madison: Wisconsin Department of Revenue, 1989); and Indiana Economic Development Council, An Assessment of Indiana's Competitive Position in Business Recruitment (Indianapolis: Indiana Economic Development Council, 1993). Earlier work is discussed in Kieschnick, Taxes and Growth.
43. James Papke and Leslie Papke, "Measuring Differential State and Local Tax Liabilities and Their Implications for Business Investment Location," National Tax Journal 39 (1986): 357-66; Leslie Papke, "Subnational Taxation and Capital Mobility: Estimates of Tax-Price Elasticities," National Tax Journal 40 (1987): 191-203; Leslie Papke, "The Responsiveness of Industrial Activity to Interstate Tax Differentials: A Comparison of Elasticities," in Industrial Location and Public Policy, ed. Henry Herzog and Alan Schlottmann (Knoxville: University of Tennessee Press, 1991), pp. 120-36; Timothy Hunt, Michigan's Business Tax Costs Relative to the Other Great Lakes States (Kalamazoo, MI: Upjohn Institute for Employment Research, 1985); Wisconsin Department of Revenue, Corporate Tax Climate: A Comparison of Nineteen States (Madison: Wisconsin Department of Revenue, 1989); and Indiana Economic Development Council, An Assessment of Indiana's Competitive Position in Business Recruitment (Indianapolis: Indiana Economic Development Council, 1993). Earlier work is discussed in Kieschnick, Taxes and Growth.
44. James Papke and Leslie Papke, "Measuring Differential State and Local Tax Liabilities and Their Implications for Business Investment Location," National Tax Journal 39 (1986): 357-66; Leslie Papke, "Subnational Taxation and Capital Mobility: Estimates of Tax-Price Elasticities," National Tax Journal 40 (1987): 191-203; Leslie Papke, "The Responsiveness of Industrial Activity to Interstate Tax Differentials: A Comparison of Elasticities," in Industrial Location and Public Policy, ed. Henry Herzog and Alan Schlottmann (Knoxville: University of Tennessee Press, 1991), pp. 120-36; Timothy Hunt, Michigan's Business Tax Costs Relative to the Other Great Lakes States (Kalamazoo, MI: Upjohn Institute for Employment Research, 1985); Wisconsin Department of Revenue, Corporate Tax Climate: A Comparison of Nineteen States (Madison: Wisconsin Department of Revenue, 1989); and Indiana Economic Development Council, An Assessment of Indiana's Competitive Position in Business Recruitment (Indianapolis: Indiana Economic Development Council, 1993). Earlier work is discussed in Kieschnick, Taxes and Growth.
45. James Papke and Leslie Papke, "Measuring Differential State and Local Tax Liabilities and Their Implications for Business Investment Location," National Tax Journal 39 (1986): 357-66; Leslie Papke, "Subnational Taxation and Capital Mobility: Estimates of Tax-Price Elasticities," National Tax Journal 40 (1987): 191-203; Leslie Papke, "The Responsiveness of Industrial Activity to Interstate Tax Differentials: A Comparison of Elasticities," in Industrial Location and Public Policy, ed. Henry Herzog and Alan Schlottmann (Knoxville: University of Tennessee Press, 1991), pp. 120-36; Timothy Hunt, Michigan's Business Tax Costs Relative to the Other Great Lakes States (Kalamazoo, MI: Upjohn Institute for Employment Research, 1985); Wisconsin Department of Revenue, Corporate Tax Climate: A Comparison of Nineteen States (Madison: Wisconsin Department of Revenue, 1989); and Indiana Economic Development Council, An Assessment of Indiana's Competitive Position in Business Recruitment (Indianapolis: Indiana Economic Development Council, 1993). Earlier work is discussed in Kieschnick, Taxes and Growth.
46. Fisher and Peters, "Industrial Incentives."
47. Kieschnick, Taxes and Growth.
48. The equity cash flow discounted at the cost of equity is the correct measure here because we know the actual terms of debt, and those terms vary depending on the public incentives being modeled; otherwise, the project returns could have been measured by cash flows before debt costs, discounted at the weighted cost of capital (including some estimated average cost of debt). The nominal cost of equity for each firm was constructed by applying average beta coefficients for that industry (from the ValueLine financial report series) to an estimate of the market risk premium in 1992, then adding an estimate of the risk-free rate of return. From this was deducted a 4% inflation premium to arrive at the real discount rate, which averaged about 10.5%. The real rate was used because all costs and revenues are left in real terms (1992 dollars); private loan terms, as well as prices of products and inputs and state and local tax policies, all are assumed constant. Although expectations regarding inflation and changes in interest rates as of 1992 are assumed to be reflected in the cost of equity in 1992, the model assumes that expectations also are unchanged over the next 20 years. The model thus does not account for the effects of inflation or uncertainty. We argue elsewhere (Fisher and Peters, "Industrial Incentives") that the failure to incorporate inflation will affect the absolute size of all project returns but will affect the relative positions of locations only in a few instances and then not significantly. Similarly, ignoring uncertainty is a problem only to the extent that it affects projects in different locations differently and to a significant degree. As a practical matter, it seems infeasible to attempt to measure differences among sites in the level of uncertainty associated with investment at those sites, although such differences may well exist (such as probabilities that taxes will be raised or lowered or that incentive clawback provisions will be enforced).
49. Sectors excluded were SIC 201 (meat products), SIC 372 (aircraft), and SIC 376 (guided missiles and space vehicles).
50. This research is part of a bigger project finally covering 24 states.
51. The median state tax system is based on the sales and corporate income tax laws of the 24 states with the most manufacturing employment in 1990 (the subject of a larger study by the authors). The median state thus has a 5% sales tax rate and a flat 7% income tax rate since they are the median rates among those 24 states. Similarly, each feature of the tax system represents the 24-state median for that feature; for example, since most of those states exempt manufacturing machinery and equipment from the sales tax, this exemption applies in the median state.
52. In the case of linked deposit and loan guarantee schemes, appropriate reductions in the rates, terms, and fees associated with private financing were applied.
53. We are not modeling the location/investment decision in all its complexity, where investment size, factor proportions, and capital structure are variable. Instead, we are developing a common yardstick for measuring the value of incentive packages; the yardstick is the value of this package to a firm making a particular standardized investment. This enables us to answer a limited set of questions. Given these particular projects, state and local incentives would be worth this much.
54. The cities modeled in the analysis are as follows: Iowa - Des Moines, Waterloo; Minnesota-Marshall, Willmar; New York - Mt. Vernon, New York City, Syracuse; Pennsylvania - Butler, Carlisle, Erie, Lancaster, Washington; South Carolina - Cayce, Summerville; Tennessee - Cookeville, Knoxville, Tullahoma; Virginia - Norfolk, Richmond, Salem, Virginia Beach, Winchester; Washington - Olympia, Puyallup, Seattle, Spokane, Tacoma.
55. Indiana Economic Development Council, Indiana's Competitive Position.