Examining the local value of economic development incentives

Evidence from four US cities

Every year local and state governments in the United States expend tens of billions of dollars on economic development incentives. Under intense pressure to deliver economic opportunity, policymakers utilize incentives to encourage private sector firms to create jobs, invest in communities, and strengthen local industries. Drawing on a detailed literature review and a unique analysis of economic development transactions in four U.S. cities (Cincinnati, Indianapolis, Salt Lake County, and San Diego), this report advances a framework for inclusive economic development to help leaders analyze and evolve their incentive policies.

The report’s key findings include:

1. Economic development incentives remain a core aspect of local and state economic development policy. This report defines economic development incentives as direct financial benefits that incentivize a firm’s opening, expansion, or retention. What distinguishes incentives from broader economic development efforts is that governments selectively provide these incentives to individual businesses, arguing that their investment or expansion would not occur but for the incentive. Estimates suggest that these policies contribute to significant public expenditures, ranging between $45 and $90 billion per year depending on the definition and estimation method.

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2. Incentives have come under renewed scrutiny from both academic researchers and the public. The competition between cities to land Amazon’s second corporate headquarters—along with the controversial billion-dollar incentives packages being offered—has thrust local and state economic development approaches into the public spotlight. Pressure to limit incentives for big corporate relocations has drawn on academic evidence that remains skeptical about the effectiveness of incentives, arguing that incentives do not influence business decisions to nearly the extent policymakers claim nor are they properly targeted to businesses and industries that can offer the greatest economic and social benefit.

3. Cities should target incentives based on core principles of inclusive economic development. A review of local and state economic development incentives provided to firms in four U.S. cities finds that transactions align with several principles of inclusive economic development but fall short on others. Cities, regions, and states must master the global scale and technological complexity of the advanced economy and address the entrenched and exclusionary biases that prevent all workers and communities from meeting their productive potential. We distill this dynamic into four principles toward which cities and states can align incentives. Drawing on unique transaction-level information with businesses in Cincinnati, Indianapolis, Salt Lake, and San Diego, we conducted a “census of incentives” to determine whether local and state incentive policies are aligned with these four principles:

  • Grow from within by prioritizing firms in advanced industries that drive local comparative advantage, innovation, productivity, and wage gains. Across all four cities, local and state economic development incentives disproportionately go to firms in advanced industries. On average, advanced industries account for about 20 percent of economic output but receive about one-third of all incentives.

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  • Boost trade by facilitating export growth and trade with other markets in the United States and abroad in ways that deepen regional industry specializations and bring in new income and investment. Across all four cities, local and state economic development incentives disproportionately go to firms in exporting industries. The export intensity of industries that receive economic development incentives—that is, the share of local output accounted for by goods and services exports—across the four cities is more than twice as high (25 percent) as the economy as a whole (11 percent).

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  • Invest in people and skills by incorporating workers’ skill development as a priority for economic development and employers so that improving human capacities results in meaningful work and wages. Partly because of their tradability and technological sophistication, incentivized industries in these four cities pay 25 percent higher wages than the overall economy. Yet, we identified concerns related to racial inclusion. Black and Hispanic workers remain underrepresented in industries that receive economic development incentives, and a low share of incentives go to firms for job training purposes.

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  • Connect place by catalyzing economic place-making, and work at multiple geographic levels to connect local communities to regional jobs, housing, and opportunity. Within this principle, many cities focus incentives on addressing blight and distress in communities of concentrated poverty. Cincinnati and Salt Lake clearly display this focus, but it is less apparent in Indianapolis and San Diego. The average poverty rate of a neighborhood in which a business or redevelopment receives incentives is nearly 30 percent in Cincinnati and 18 percent in Salt Lake, compared to jurisdiction-wide poverty rates of 18 percent and 12 percent, respectively.

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4. Economic development leaders should ensure incentives policies align with broader economic objectives, embrace public transparency and rigorous evaluation, and only target firms that advance broad-based opportunity. While not a full analysis of economic impact, our findings offer some implications for economic development incentives policy and practice. First, policymakers should ensure incentives reflect local and regional economic objectives. This census of incentives provides one guide for how cities can situate their incentives practices within four principles of inclusive economic development. Second, localities must commit to making incentives information publicly transparent, and then rigorously evaluate their impact on firm outcomes to determine what works. Finally, clearer criteria and more effective targeting should reserve incentives only for those firms that will advance broad-based opportunity, either by incentivizing opportunity-rich firms and industries, incentivizing firms to provide workers more opportunity, or by addressing place-based disparities in opportunity.

Fortunately, we observe progress toward a more responsible and rigorous incentives approach in many U.S. cities, signaling a nascent but necessary progression in the practice of economic development. We hope this report can help provide insights and tools to local leaders as they undertake that important and needed evolution.