The Effectiveness of Firm-Specific State Tax Incentives in Promoting Economic Development: Evidence from New York State's Industrial Development Agencies

Abstract

This article discusses the effectiveness of industrial development agencies (IDAs) in contributing to economic development in New York State by providing firm-specific tax incentives. The costs of IDAs, especially in terms of forgone tax revenues, are documented. The benefits of IDAs are partially reviewed, and a methodology for the wider evaluation of the benefits of IDAs-which may yet become possible—is set forth. The authors conclude that New York State's experience with its IDAs provides evidence that firm-specific tax incentives are ineffective in promoting economic development. The reason is straightforward: An analysis of the evidence shows that the benefits of IDAs are questionable, whereas their costs, in terms of forgone tax revenues, are clear and substantial. Between 1987 and 1991, for example, IDA activity resulted in few verifiable economic benefits to New York State, although causing state and local governments to lose over $1.3 billion in tax revenues.