There’s little evidence that the economic-development incentives offered by cities and states work

See The Amazon HQ2 Fiasco Was No Outlier by Nathan M. Jensen. He is a professor of government at the University of Texas, Austin and the co-author (with Edmund J. Malesky) of Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain. Excerpts:

"When Amazon announced last month that it would split HQ2 between New York City and Arlington, Va., losing applicants cried foul: They accused Amazon of an extraordinary bait-and-switch, enticing dozens of bidders to increase the competition and the incentive offers, only to end up with two of the most obvious candidates all along.

The reality is that this sort of competition for big projects, while unusually large in the Amazon case, is the rule not the exception in economic development and has been for a long time. It has been happening in the U.S. since Alexander Hamilton received local tax exemptions in 1791 to build up the city of Paterson, N.J. as an industrial center. What’s different in our own era is that most companies aren’t actually changing their decisions based on incentives but are pocketing substantial benefits anyway.

Studies show that the cost and frequency of incentive packages—which cities and states typically offer companies to either relocate or stay put—have been rising. Secrecy surrounding many of the deals makes a full accounting difficult, but a new database assembled last year by the Upjohn Institute for Employment Research covers programs for 47 cities in 33 states. It found that the cost of such incentives more than tripled from 1990 to 2015, to $45 billion.

A Washington, D.C.-based watchdog group, Good Jobs First, has compiled data on deals worth more than $50 million each and reports that cities and states have awarded companies nearly 400 incentive packages of that size since the late 1970s—more than a third of them just since 2012. Nineteen of those deals surpassed $1 billion each. The largest package ever accepted was Washington state’s $8.7 billion in response to Boeing’s threat to leave the state in 2013, the group says. The biggest deal known to have been offered without being accepted was disclosed this week through a public-records request: more than $22 billion over 99 years from Dallas-Forth Worth International Airport and nearby cities, for HQ2.

Despite the giant dollar amounts, the Upjohn Institute found that investors mostly don’t change their investment decisions based on incentives. A 2018 review by economist Tim Bartik of 30 different studies of incentive offers concluded that 25% or fewer of the investors were swayed by the offers. The other 75% or more were coming anyway, Dr. Bartik found; they were just capturing added benefits from taxpayers."

"numerous companies applied for incentives after they had already broken ground and, in some cases, after they had completed building. A few even noted in their applications that they weren’t looking at other states for their investments. Yet all of these companies received taxpayer dollars for doing what they would have done anyway."

"Though incentives are rarely effective in changing firms’ investment decisions, they do allow politicians to attend ribbon-cutting ceremonies where they can highlight their own role in attracting a new company (or retaining an old one) and creating jobs."

"Defenders of economic incentives often argue that, though the system is flawed, it is necessary in order for localities to compete, or that the benefits more than pay for themselves. Yet some cities and states have studied their own programs and found reasons to re-evaluate. Virginia’s 2017 examination of its film incentive program found that every $1 in tax credits yielded only 20 cents in tax revenue, spurring recommendations to reform or cancel it. Washington, D.C.’s November evaluation of its economic development incentives showed that numerous programs have targeted firms that were coming anyway. California’s Legislative Analyst’s Office reviewed the state’s flagship economic development incentive program, California Competes, and called for ending it."