Economic Development Incentives: What Can We Learn From Policy Regime Changes?

Abstract

The authors investigate state-level economic incentive policies in the United States using the Panel Database on Incentives and Taxes for economic development (PDIT). Although interest in evaluating the efficacy of tax and incentive programs is growing, data limitations are formidable: Tax policies and expenditures are difficult to track and administrators are not equipped to gather the data needed for rigorous evaluation. The PDIT covers 45 industries in 32 U.S. states, including the main cities in the 30 largest metropolitan areas. The PDIT simulates the value of an incentive in terms of value added of a hypothetical firm in a particular industry, state, and year from 1990 to 2015. The authors identify and exploit large, discrete changes in incentive policies (e.g., regime changes). Applying the difference-in-differences method, they investigate potential causal links between regime changes and medium-run economic outcomes, including employment, establishment counts, wages, and poverty rates.