Variation in the Heartland: Explaining the Use of Economic Development Incentives in Three Great Lakes States

Abstract

We identify the factors correlated with the use of economic development incentives after the Great Recession of 2007–2009 to determine the presence of entrepreneurial development regimes. We utilize a unique dataset that combines information on incentives (tax increment financing districts and selected tax abatements and business assistance) with economic, fiscal, and political characteristics for all municipalities in the largest Metropolitan Statistical Areas of Illinois, Wisconsin, and Michigan. These three states bordering Lake Michigan share similar histories and settings, thus targeting the research focus on the key attributes of interest. Our empirical results demonstrate substantial dissimilarity between incentive types and across states, most likely due to policy structures and reforms at the state level that encourage different municipal development regimes. Whereas municipalities, particularly larger ones, continue to use tax abatements, exemptions, and credits to pursue employment growth, the municipalities gravitating toward tax increment financing tend to be suburbs with low unemployment rates and relatively highly educated residents, and not places with greater employment density or manufacturing employment.