Who offers tax-based business development incentives

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Whoofferstax-basedbusinessdevelopmentincentives?q

R.AlisonFelixa,JamesR.HinesJr.b,?

ab

RegionalAffairsDepartment,FederalReserveBankofKansasCity,DenverBranch,102016thStreet,Denver,CO80202,UnitedStates

DepartmentofEconomics,UniversityofMichiganandNBER,343LorchHall,611TappanStreet,AnnArbor,MI48109-1220,UnitedStates

articleinfoabstract

ManyAmericancommunitiesseektoattractorretainbusinesseswithtaxabatements,taxcredits,ortaxincrement?nancingofinfrastructureprojects(TIFs).Theevidencefor1999indicatesthatcommunitiesaremostlikelytoofferoneormoreofthesebusinessdevelopmentincentivesiftheirresidentshavelowincomes,iftheyarelocatedclosetostateborders,andiftheirstateshavetroubledpoliticalcultures.Tenpercentgreatermedianhouseholdincomeisassociatedwitha3.2%lowerprobabilityofofferingincentives;10%greaterdistancefromastateborderisassociatedwitha1.0%lowerprobabilityofofferingincentives;anda10%higherrateatwhichgovernmentof?cialsareconvictedoffederalcorruptioncrimesisassociatedwitha1.2%greaterprobabilityofofferingbusinessincentives.TIFsarethepreferredincen-tiveofcommunitieswhoseresidentshavehouseholdincomesbetween$25,000and$75,000;whereasTIFsaremuchlesscommonlyofferedbycommunitieswhoseresidentshavehouseholdincomesbelow$25,000.Theneedto?nanceTIFsoutofincrementaltaxrevenuesmaymakeitinfeasibleformanyofthepoorestofcommunitiestouseTIFsforlocalbusinessdevelopment.

Ó2013PublishedbyElsevierInc.

Articlehistory:

Received24September2011Revised11December2012

Availableonline29December2012JELClassi?cations:H25H71H73

Keywords:

BusinessdevelopmentincentivesTaxabatementsTaxcreditsTIFs

1.Introduction

LocalgovernmentsintheUnitedStatescompetewitheachothertoattractbusinessesandtherebyenhancetheeconomicprospectsoflocalresidents.Thiscompetitiontakesmanyforms,commonlyincludingoffersoftax-basedincentivesto?rmsthatcanbeinducedtoestablish,expand,ormaintainlocalbusinessoperations.Thesetax-basedincentivesconsistofdirecttaxbene?ts,thatincludeabatementsofexistingtaxesorcreditsagainstpotentialtaxliabilities,andtheuseoftaxincrement?nancings(TIFs)ofbusiness-orientedinfrastructureprojects.Thereiswidespreaduseoftheseincentives:56%ofAmericancom-munitiesreportofferingtax-basedbusinessdevelopmentincen-tivesin1999,afractionthatroseto59%by2004.TheUS

TheauthorsthankAndrewFayad,SarahSaeed,andTheodosiaTeniaforexcellentresearchassistance,andDhammikaDharmapala,BradleyHeim,JessicaStahl,twoanonymousreferees,andparticularlyGillesDurantonforcommentsonearlierdrafts.Theviewsexpressedinthispaperarethoseoftheauthorsanddonotnecessarilyre?ectthepositionsoftheFederalReserveBankofKansasCityortheFederalReserveSystem.?Correspondingauthor.

E-mailaddresses:alison.felix@http://wendang.chazidian.com(R.A.Felix),jrhines@umich.edu(J.R.HinesJr.).

0094-1190/$-seefrontmatterÓ2013PublishedbyElsevierInc.http://wendang.chazidian.com/10.1016/j.jue.2012.12.003

q

aggregatedollarvalueofbusinessdevelopmentincentivesisnotknown,thoughjournalisticaccountsputtheannual?gureintheneighborhoodof$80billion.1

Despitetheattractivenessofencouraginglocalbusinessactiv-ity,manyjurisdictionsintheUnitedStateshavebeenunwillingtoprovidetax-basedbusinessdevelopmentincentives.Thisreluc-tancestemsfrommanysources,includingthepotentialrevenuecostsofsuchconcessions,doubtsabouttheireffectivenessinencouragingbusinessactivity,aphilosophythatacrosstheboardtaxreductionsaremoreeffectivethantargetedtaxincentives,andperhapsanevaluationthatthebene?http://wendang.chazidian.communitieswithdifferingecon-omiesanddemographicsmaywellevaluatethesetradeoffsdiffer-ently.Furthermore,evengovernmentsofcommunitiesthatagreeonthepotentialvalueoftargetedtaxincentivesmaynotallofferthem,giventherealitiesofbureaucraticandpoliticalbarrierstoimplementingprogramsthatrequireeffectiveaction.

Thegoalofthispaperistounderstandwhycitiesandcountiesofferthetax-basedbusinessincentivesthattheydo.Theanalysis

TheNewYorkTimesreportsidentifying1874stateandlocalbusinessdevelop-mentprogramswithanaggregatevalueof$80.4billion/year;seehttp://wendang.chazidian.com/interactive/2012/12/01/us/government-incentives.html.Fractionsofcommunitiesreportingthattheyofferedincentivesin1999and2004arebasedontheEconomicDevelopment1999surveyandtheEconomicDevelopment2004surveyfromtheInternationalCity/CouncilManagementAssociation;the1999surveyisdescribedindetailinSection3.

1

R.A.Felix,J.R.HinesJr./JournalofUrbanEconomics75(2013)80–9181

startsbyidentifyingthecharacteristicsofUScommunitiesthatareassociatedwithprovisionoftax-basedbusinessincentives.Thentheempiricalworkconsidersonlythosecommunitiesthatprovideincentives,distinguishingfeaturesassociatedwithprovidingTIFsfromfeaturesassociatedwithprovidingtaxabatementsandcredits.

Severalpatternsareevidentinthedata.Heavilypopulatedcit-iesandcounties,thosewithlowmedianincomes,andthosewithlargerconcentrationsofmanufacturingindustries,arethemostlikelytoofferbusinessincentives.Thecorrelationsofthesecharac-teristicsandtheprovisionofbusinessincentivesatleastinpartre-?ectthevaluethatcommunitieswithstrongeconomicneedsattachtoattractingnewemploymentopportunities,http://wendang.chazidian.communitieswithlowerincomesaremorelikelythanotherstoofferbusinesstaxincentives,butthisproclivityisnomorepro-nouncedamongthosewithhigherfractionsofverypoorresidents(below$25,000householdincome)thanitisamongcommunitieswithhigherfractionsofmiddleincomeresidents($25,000–$75,000householdincome).Theneedforeconomicactivitymaybegreatestinthepoorestcommunities,butbusinesstaxincentivessomewhatlesseffectivetherethanelsewhere,andmoredif?cultforlocalgovernmentstoimplement.

Twoadditionalnoteworthyfeaturescharacterizecommunitiesofferingbusinesstaxincentives.The?rstisthatcommunitieslo-catedclosetostatebordersaresigni?cantlymorelikelythanotherstoofferincentives.Proximitytootherstatesincreasesthecompeti-tivenessoftheenvironmentforattractingbusiness,drivingcommu-nitiestoofferattractivepackageseventoretainexistingbusinesses.Furthermore,theprospectofattractingbusinessesandaccompany-ingtaxrevenuefromotherstatesmayincreasethewillingnessofstategovernmentstooffer?nancialandotherassistancetotheirowncommunitiesthatprovidebusinessdevelopmentincentives.Thesecondfeatureisthatcitiesandcountiesinstateswithtroubledpoliticalculturesdemonstratethegreatestwillingnesstoofferbusinessdevelopmentincentives,theevidenceindicatingthatincreasingtherateatwhichgovernmentof?cialsarecon-victedoffederalcorruptioncrimesby1per100,000residentsovera13yearperiodisassociatedwitha2.9%greaterchancethatacommunitywillofferbusinessincentives.Onepossibilityraisedbythisevidenceisthatsmallnumbersofcorruptandquasi-cor-ruptgovernmentof?cialsinthesejurisdictionsprovidebusinessincentivesinreturnforcash,politicalsupport,orotherformsofpayouts.Adifferent,andperhapsonlyslightlymore?attering,interpretationisthatjurisdictionsinstateswithtroubledpoliticalculturesaremorelikelythanotherstohavedysfunctionaltaxandregulatorysystemsthatmakeitdif?cultforthemtocompeteforbusinessesexceptbyofferingspecialincentives.

Thesecondpartofthepaper’sempiricalinvestigationconsidersonlythosecommunitiesofferingsomebusinesstaxincentives,identifyingthecharacteristicsassociatedwithprovisionofdirecttaxreductions,intheformoftaxabatementsortaxcredits,ratherthanprovisionofinfrastructureimprovements(suchasnewroadsandsewerfacilities)facilitatedbytaxincrement?nancing.Taxincrement?nancingtypicallyentailsdebt-?nancedprojectsforwhichsubsequentadditionalrevenue(arguably)attributabletoenhancedbusinessactivityisdevotedtopayingoffthedebtsin-curredinundertakingtheinfrastructureimprovements.Amongjurisdictionsthatofferincentives,thosewithsigni?cantnumbersofhouseholdswithincomeslessthan$25,000arethemostlikelytooffertaxreductionsratherthanTIF-supportedinfrastructureprograms,whereasthosewithsigni?cantnumbersofhouseholdswithincomesbetween$25,000and$75,000arethemostlikelytoofferTIFsratherthantaxreductions.BythismeasureTIFsap-pearnottobeeffectivelydirectedtowardthelowest-incomecom-munities.Andpoliticalcultureappearstoin?uencetheformas

wellasthelevelofdevelopmentincentives:increasingtherateatwhichgovernmentof?cialsareconvictedoffederalcorruptioncrimesby1per100,000residentsovera13yearperiodisassoci-atedwitha5.9%greaterprobabilitythatacommunitywilloffertaxreductionsratherthanTIFs.

http://wendang.chazidian.communitieswithlow-incomeresidentsstandtobene?tfromemploymentandothereconomicopportunitiesthataccompanygreaterbusinessoperations,butareoftenunabletouseTIFprogramsduetotheinabilityofevenenhancedbusinessactivitytogeneratesuf?cientlocaltaxrevenuetoretiredebtsacquiredinundertakingtheaccompanyinginfra-structureprojects.Self-interestofadifferentkindmaybeatworkintheproclivityofcommunitiesinstateswithhigherratesoffed-eralcorruptionconvictionstofavordirecttaxbene?tsoverTIFs,thoughthispatternmayalsore?ectbondmarketskepticismoftheabilityandwillingnessoftroubledpoliticalsystemstorepayinfullanyobligationsincurredinthecourseofprovidingbusinessinfrastructure.

Section2ofthepaperdiscussesthechallengesthatcommunitiesfaceinusingbusinessdevelopmentincentivestoattractandretainbusinessactivity.Section3describestheavailabledataontheprac-ticesofAmericancommunitiesinofferingtax-basedbusinessincen-tivesin1999.Section4presentstheresultsofestimatingthedeterminantsofwhooffersbusinessincentives;Section5presentstheresultsofestimating,amongcommunitiesofferingsomekindofincentive,thedeterminantsofwhoofferstaxreductionsorTIFstotheexclusionoftheother.Section6istheconclusion.2.Businessdevelopmentincentives

Businessdevelopmentincentiveshavethepotentialtoattractinvestment,employment,andnettaxrevenuestocommunitiesofferingthem.DiamondandMirrlees(1971)identifytheef?ciencycoststhatjurisdictionsincurbyattemptingtotaxreturnsearnedbymobilebusinesscapital.Fromtheiranalysisitfollowsthattaxesonless-mobilefactorsareapttoentailsmallercostswiththesamedistributionaleffects,particularlyforjurisdictionsthataretoosmalltoaffectmarketratesofreturn.2Taxabatements,taxcreditsandTIFs,ifofferedonaselectivebasistothemostmobilebusi-nesses,andthosethatgeneratespilloverstoother?rms,canpermitcommunitiestomaintainbusiness,property,andsalestaxesthatgeneraterevenuewithoutreducingbusinessactivitytothesamede-greethattheywouldintheabsenceofincentives.3Asapracticalmatter,however,giventhedif?cultyofdistinguishingbusinessesonthebasisofpotentialmobility,andtherestrictedsetoftaxinstru-mentsavailabletolocalcommunities,governmentsfacetradeoffsbetweenraisingtaxrevenuesandattractingbusinessactivity.2.1.Consequencesofbusinessdevelopmentincentives

Despitetheirobviousappealtoinvestors,itisnotguaranteedthatbusinessdevelopmentincentivesencouragelocaleconomicactivity,asincentivescanbecostly,possiblycomingattheexpenseofgeneraltaxreductions,educationorinfrastructureimprove-ments,orotherusesoffundsthatcouldimpactbusinessactivitytoanevengreaterextentthandoincentives.Bartik(1991)offersacriticalsurveyofearlierempiricalstudiesoftheimpactofstate

2

SeeGordon(1986)foranelaborationofthisargumentandGordonandHines(2002)forafurtherexposition.3

Keen(2001)andHongandSmart(2010)analyzethewelfareconsequencesofdistinguishingthetaxtreatmentofmore-mobileandless-mobileinvestmentsinsettingsinwhichjurisdictionscompeteformobileinvestments;Garcia-MilaandMcGuire(2002)considertaxincentivesinanenvironmentinwhichthereareagglomerationeconomies.

82R.A.Felix,J.R.HinesJr./JournalofUrbanEconomics75(2013)80–91

andlocaleconomicdevelopmentpolicies,andbusinesstaxincen-tivesinparticular;Wasylenko(1997)andFisherandPeters(1997)provideupdatesandextensions.Mostofthesurveyedstudies,includingNewman(1983),WasylenkoandMcGuire(1985)andPapke(1994),concludethatprovisionofbusinesstaxincentivescontributestolocalbusinessinvestment,employment,andeco-nomicgrowth,thoughothers,includingCarlton(1983)andBoar-netandBogart(1996),reportfewornodiscernibleeffects.Sincetheleveloflocaleconomicactivityisin?uencedbymanyconsider-ations,itcanbedif?culttoidentifytheimpactofdevelopmentincentivesindependentlyofotherfactorsthatmaybecorrelatedwithprovisionofincentives.Forexample,somecommunitiesofferingincentivesmaydosobecausetheywouldotherwisehavelittleeconomicactivity,orfearthateconomicactivitywouldde-cline;whereasothersofferincentivesaspartofapackageofsuc-cessfulbusiness-friendlymeasures.

Morerecentstudiesevaluatetheeffectofbusinessdevelopmentincentivesinwaysthatattempttolimitthepotentialimpactofomittedvariables.Severalofthesestudiesconcernenterpriseandempower-mentzoneprogramsthatprovidepackagesoftaxreductionsandcred-its.4GreenstoneandMoretti(2003)compareincomeandpropertyvaluegrowthincountiesthatreceived‘‘milliondollarplants’’–verylargenewinvestments–toincomeandpropertyvaluegrowthincountiesthatjustmissedbeingchosenaslocationsforthenewplants.Thestudyreportssigni?cantdifferences,withearningsinaffectedindustries,andpropertyvaluesgenerally,growingmorerapidlyinthewinningcounties.This?ndingisconsistentwithevidenceforMichigan(Anderson,1990)andIndiana(ManandRosentraub,1998)thatpropertyvaluesgrowmorerapidlyincitiesofferingTIFsthaninobservationally-similarcitiesthatdonot,thoughDyeandMerriman(2000)reporttheoppositeresultforcitiesintheChicagoarea.

Effectsofincentivesappeartodifferaccordingtothesetting.Forexample,Hoytetal.(2008)?ndthattrainingandtaxincentivesprovidedbyKentuckypositivelyaffectemploymentincountiesreceivingtheincentives,andreportthattheeffectsareparticularlystrongincountiesalongthestateborder.BondonioandGreen-baum(2007)offerevidencethatenterprisezoneprogramsintenstatesencourageemploymentandcapitalspendingbynewestab-lishmentstoagreaterdegreethanexistingestablishments.EiniöandOverman(2011)analyzetheimpactofanEnglishprogramthattransferredresourcestolocalgovernmentsindepressedcommuni-tiesforuseinencouraginglocalbusinessactivity,reportingposi-tiveeffectsonlocalemploymentandbusinessactivity,butnegativeeffectsonemploymentandbusinessactivityinnearbyareas.TheEiniöandOvermanpapernotonlycomparesoutcomesintreatedanduntreatedlocalities,butexploitsdiscontinuitiesinprogrameligibilitytoidentifytheeffectoflocalbusinessdevelop-mentresources.Mayeretal.(2012)offersimilarevidencethataFrenchenterprisezoneprogramencouragesbusinessestolocateinselectedneighborhoodslargelyattheexpenseofundesignatedneighborhoodsinthesamemetropolitanarea,andthattreatmenteffectsvarybycommunity,?rm,andindustry.Thisstudylikewise

4

O’Keefe(2004)usespropensityscorematchingtocomparetheexperiencesofCaliforniacommunitiesdesignatedasenterprisezoneswithotherwise-similarcommunitiesthatwerenotenterprisezones,?ndingthatenterprisezonedesignationisassociatedwithmorerapidemploymentgrowth;NeumarkandKolko(2010)revisittheCaliforniaenterprisezoneprogramusinglaterdataandmore?ne-grainedgeographicalinformation,reportinginsigni?cantemploymenteffects.Hanson(2009)considerscommunitiesthroughouttheUnitedStatesdesignatedasfederalempow-ermentzonesandothersthatunsuccessfullyappliedforempowermentzonedesignation;asimplecomparisonindicatesthatempowermentzonedesignationisaccompaniedbyrisingemploymentanddecliningpovertyrates,thoughtheseeffectsareinsigni?cantininstrumentalvariablesspeci?cations.Bussoetal.(forthcoming)?ndthatacommunity’sdesignationasaRoundIfederalurbanEmpowermentZoneincreasedlocalwagesandemploymentrelativetoothercommunitieswhoseEmpowermentZoneapplicationsweredeniedandcommunitiesthatwerelaterdesignatedEmpowermentZones.

identi?estreatmenteffectsfromdiscontinuitiesineligibilityto-getherwithpanelvariationintreatmentsandprogrammaticchangesovertime.

Communitiesdifferintheirwillingnesstoofferbusinessdevel-opmentincentives.Inanextensivereviewoftheearlierliterature,WolmanandSpitzley(1996)documentthemanyvariablesthathavebeenusedtoexplaintheproclivitytoofferincentives,includ-ing,mostfrequently,localgovernmentstructure,?scalstress,eco-nomicneed,economicdistress,economicopennessorcitizenaccess,andcitysize.Forexample,Anderson(1990)?ndsapositivecorrelationbetweenpriorhighpropertyvaluegrowthandTIFadop-tionbyMichigancities,suggestingthatTIFsaremorelikelytobeusedincitiesthatexperienceandanticipaterapidpropertyvaluegrowth,thoughitisdif?culttoestablishthedirectionofcausality.Man(1999)?ndsthatlowincomeIndianacommunitiesarethemostlikelytoadoptTIFs,andthatdecliningintergovernmentalaid,growthinpropertytaxliabilities,adoptionofTIFsbyneighboringjurisdictions,ahighconcentrationofserviceindustries,ahighprop-ertytaxpriceoflocalpublicgoods,andexistinguseofpropertytaxabatementsareallpositivelycorrelatedwithTIFadoption.5

Thereislimitedexistingresearchonthedeterminantsofthetypeofincentiveajurisdictionoffers.OnesuchstudybyRubinandRubin(1987)examinesthechoicebyIllinoiscitiestooffercashsubsidies,revenuebonds,waterratereductionsorinfrastructuretoattractandretainbusinessactivity.Thestudyreportsthatcitieswithlowincomesandhighunemploymentaremorelikelythanaf?uentcitiestoofferinfrastructureimprovements,taxabate-mentsandTIFs,butnomorelikelytoofferlessexpensivealterna-tives,suchasindustrialrevenuebonds;furthermore,citieswithlargeinternalemploymentandhighadministrativecapacityarethemostlikelytoofferanykindofincentive.2.2.Frameworkforempiricalanalysis

Acommunity’sdecisionofwhetherornottooffertax-basedbusinessincentivesre?ectsaweighingofbene?tsandcosts,withef?cientincentivelevelscorrespondingtopointsatwhichmar-ginalbene?tsequalmarginalcosts.Itisusefultoconsidertheben-e?tsandcostsofofferingincentivessuf?cienttogenerateanadditional10jobsofaveragequality.Thenetbene?tsthatcommu-nityiobtainscanbedenotedBi,inwhich:

Bi¼b1Xiþe1i;

ð1Þ

b1isavectorofcoef?cients,Xiisavectorofjurisdictionattributes,ande2iisaresidual.Thecostofofferingincentivessuf?cienttogen-erateanadditional10jobsofaveragequalitycanbedenotedCi,inwhich:

Ci¼b2Xiþe2i;

ð2Þ

b2isavectorofcoef?cients,Xiisavectorofjurisdictionattributes,ande2iisaresidual.

Differencingthetwo,

BiÀCi¼ðb1Àb2ÞXiþui;

ð3Þ

inwhichui e1iÀe2iisadifferencedresidual.

5

Byrne(2005)reportssimilarevidencethatChicagoareacommunitiesaremorelikelytoofferTIFsiftheirneighborsdoso,andwithinthecityofChicago,Gibson(2003)?ndsthatdisadvantagedneighborhoods(thoughnottheverypoorest)arethemostlikelytoofferTIFs.AndersonandWassmer(1995)?ndsimilarpatternsintheadoptionofpropertytaxabatements:intheirpanelofDetroitmetropolitanareacommunities,thosewithhigherincomesandhigherpropertytaxpricesoflocalpublicserviceswaitlongertoofferpropertytaxabatements.Toacertaindegree,differencesinwillingnesstoofferincentivesmayre?ectthecompositionoftheindustriesand?rmsthatarepotentialbene?ciaries:Byrnesetal.(1999)?ndthatOhiojurisdictionsaremorelikelytooffertaxabatementsto?rmswithhighercreditratingsandthoseofferingtocreatesigni?cantnumbersofnewjobs,whichisconsistentwithevidenceprovidedbyFisherandPeters(1998)thatbusinessdevelopmentincentivesareconcentratedamonglargeplants.

R.A.Felix,J.R.HinesJr./JournalofUrbanEconomics75(2013)80–9183

AsexpressedinEq.(3),anyassociationofcommunityattributeswithnetbene?tsofofferingincentivesre?ectsbothbene?ts(b1)andcosts(b2),makingitimpossibletodistinguishonthebasissim-plyofincentiveprovisionthefactorsthatin?uencebene?tsfromthosethatin?uencecosts.Itmay,however,bereasonabletoexpectcertainelementsofXitoaffectthebene?tandcostfunctionstodif-feringdegrees,therebypermittingaformofsuchinference.Somecommunitycharacteristicsarelikelytoaffectthevaluationofbusi-nessactivitythatadds10jobsmorethantheyaretoaffectthecostofattractingbusinesses.Forexample,low-incomecommunitiesarethemostlikelytohavedepressedlabormarketsandthereforeattachgreatervaluetoattractingnewbusinesses,whereasincomelevelsmaybelesscloselycorrelatedwiththecostsofattractingorretainingbusinesses.Similarly,communitieswithdysfunctionalelementssuchastroubledpoliticalcultureswillhavefewerlocal?rmsthantheireconomicconditionswouldotherwisewarrant,andthereforeattachgreatervaluetothosetheycangetwithtax-baseddevelopmentincentives.

http://wendang.chazidian.communitieswhoseeco-nomicorgeographicsituationsmakethemgoodcandidatesforstateassistanceintheformofmatchinggrants,taxcredits,orstateaidtocompensateforrevenuelostinaattractingnewbusinesseswillfacelowercostsofdevelopmentaidthandoothercommuni-ties.Citiesandcountiesnearstatebordersareinthestrongestpositionstoattractstateaidfortheirdevelopmentefforts,sincemarginalbusinessesattractedbytax-basedincentivesare,intheircases,morelikelythanusualtocomefromnearbystatesthanfromothercommunitieswithinthesamestate.Totheextentthatstategovernmentsexplicitlyorimplicitlysharesomeofthecostsofattractingbusinessactivityfromoutsidethestate,communitiesnearbordersfacelowercostsofprovidingincentives.

Aseparatedimensionalongwhichcommunitiesmaydifferinthecostoftax-baseddevelopmentincentivesspeci?callyinvolvesTIFs,whosefundingreliesonbondissuesthatarerepaidwithsub-sequenttaxcollections.Verylow-incomecommunitiesmay?nditextremelycostlytoprovideTIFsupportsuf?cienttoattractsignif-icantnewbusinesses,becausetheunreliabilityoftheirtaxcollec-tionscannecessitateveryhighdefaultpremiumsintheinterestratesonTIFbonds.

Animportantdif?cultythatarisesinidentifyingtheimpactofcommunityincomeontherelativecostsofprovidingTIFincentivesandothertaxincentivesisthatevidenceofthechoicebetweentheseincentivesisin?uencedbythebene?tstobeobtainedbyencouragingnewbusinessdevelopment.Ifacommunitybene?tsrelativelylittlefrombusinessdevelopment,thenitwilloffernei-therTIFsnortaxabatementsandcredits,andasaresult,onedoesnotobservethepreferredchoiceofincentive.Alternatively,ifacommunitybene?tsgreatlyfrombusinessdevelopment,itislikelytoofferbothtypesofincentive,sinceeitherincentiveinisolationisapttofacediminishingreturns,re?ectingthatthemosteffectivetaxincentivesortargetsofTIFfundingarelikelytobethe?rstpro-jectsundertaken.Consequently,simpleregressionsdesignedtoidentifyobservablesassociatedwithleast-costmethodsofencour-agingbusinessdevelopmentencountertheproblemthatobserva-tionsofincentiveuseareendogenoustopotentialbene?tlevels,includinganyeffectofomittedvariablesonpotentialbene?ts.ItispossibletoidentifycommunitycharacteristicsassociatedwithdifferencesbetweenthecostsofprovidingTIFandthecostsofprovidingothertaxincentivesbycomparingtheattributesofthosecommunitiesofferingTIFs,butnotothertaxincentives,withtheattributesofcommunitiesofferingothertaxincentives,butnotTIFs.Therationalebehindthismethodisthatthereisacommonfactor,perhapspartlyunobserved,thatin?uencesthebene?tsofnewbusinessactivityandtherebywhetherornottooffertax-baseddevelopmentincentives.Itisthenpossibletoidentify

theeffectofothervariablesonthischoiceusingtheChamberlain(1980)?xedeffectslogitprocedure,inwhichthesampleisselectedtoincludeonlythosejurisdictionseitherofferingTIFsbutnottaxabatementsorcredits,orelseofferingeitherorbothoftaxabate-mentsandcredits,butnotTIFs.Onewaytointerpretthisproce-dureisthatitlimitsthesampletojurisdictionsforwhichbusinessdevelopmentoffersmoderatebene?ts,andthereforemakespossiblecomparisonsbetweenmethodsoffacilitatingbusi-nessdevelopment.

3.Tax-basedbusinessincentivesin1999

TheempiricalworkdescribedinSections4and5ofthepaperisbasedoninformationdrawnfromasurveyofthechiefdevelopmentof?cersofAmericanmunicipalitiesandcountiesbytheInterna-tionalCity/CountyManagementAssociation(ICMA),atradeassoci-ationoflocalgovernmentof?cials.Thesurveywasconductedbetweenfall1999andspring2000.6TheICMAreceived1042repliesto3308surveysdistributedduringthatperiod,foraresponserateof31.5%.Amongmanyotherquestions,thissurveyasksrespondentstoindicate‘‘whichofthefollowingincentivesyourlocalgovernmentoffers,’’withseparatechoicesincludingtaxabatements,taxcredits,andtaxincrement?nancing.7AsmallnumberoftherespondentsintheICMAsurveydidnotanswerthequestionsregardingeconomicdevelopmentincentives.Amongthe1022useablereplies,68%oftherespondentsreportofferingsomekindofeconomicdevelopmentincentive,and56%reportofferingsomekindoftaxincentive.36%re-portofferingtaxabatements,17%reportofferingtaxcredits,and34%reportofferingTIFs.Thesesummarystatisticsalongwithothervari-ablesusedintheempiricalanalysisarepresentedinTable1.

TheICMAdatawerematchedtoUSCensusofPopulationdataonpopulationcharacteristicsforthesamejurisdictionsfor2000.MedianhouseholdincomesofcommunitiessurveyedbytheICMAhadameanof$46,815in1999;themeanpercentageofhouseholdswithincomesbelow$25,000was27%,andthemeanpercentageofhouseholdswithincomesbetween$25,000and$75,000was48%.Thepopulationrepresentedinthissampleaver-agesslightlymoreincomethantheUSpopulationasawhole.8ThecommunitiesintheICMAsampleaveraged2.6%ofworkersover16usingpublictransportationtocommutetoworkin2000,andaver-aged14%oftheirpopulationsemployedinmanufacturing,re?ectingsomewhatlowerproclivitiestocommutetoworkorworkinmanu-facturingthanaverageAmericanworkers.9

TheICMAsampleissomewhatunevengeographically,with16%ofthesurveyresponsesfromthenortheast,29%fromthe

6

Thesedataareavailableat:http://wendang.chazidian.com/Economic_Develop-ment_1999_Data_C92.cfm.TheICMAadministeredsimilarsurveysofAmericancitiesandcountiesin2004and2009,butwithsigni?cantlysmallersamplesizes,whichiswhythispaperanalyzesthe1999data(thoughthe?rstparagraphofthispaperreferencestheprevalenceoftax-basedbusinessdevelopmentincentivesasre?ectedinthe2004data).7

Thecompletelistofpotentialincentivesidenti?edonthesurveyinstrumentis:taxabatements,taxcredits,locallydesignatedenterprisezones,federal/statedesignatedenterprisezones,taxincrement?nancing,grants,infrastructureprograms,freelandorlandwritedowns,employeescreening,trainingsupport,utilityratereduction,zoning/permitassistance,regulatory?exibility,relocationassistance,low-costloans,one-stoppermitissuance,specialassessmentdistricts,subsidizedbuildings,andother.8

AccordingtotheUSCensus,mean1999householdincomeincommunitiesrespondingtotheICMAsurveywas$59,818,whereasmeanhouseholdincomeintheentireUnitedStatesthatyearwas$56,643.9

Census?guresindicatethatthefractionofworkers16andoverwhousedpublictransportationtocommutetoworkin2000was3.1%forthoselivingincommunitiesrespondingtotheICMAsurveyand4.7%fortheUnitedStatesasawhole.Thefractionoftheemployedcivilianpopulationworkinginmanufacturingwas12.4%forresidentsofcommunitiesrespondingtotheICMAsurveyand14.1%forallUSresidents.

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Table1

Summarystatistics.Variable

R.A.Felix,J.R.HinesJr./JournalofUrbanEconomics75(2013)80–91

Mean0.68400.55580.36300.16730.338646814.760.27050.48340.753985734.390.0258À0.13950.1415129098.800.12430.86691868.735.74275.32525.26373.9561

Standarddeviation0.46520.49710.48110.37340.473417456.680.11810.07010.1413182878.900.03670.08470.0734125311.500.33000.3398385.303.30301.20183.25951.7520

#ofobservations10221022102210221022102210221022102210221022102210229881022102210221022102210221022

OfferanyincentiveOfferanytaxincentiveOffertaxabatementOffertaxcreditOfferTIF

Medianhouseholdincome

PercentofHHearninglessthan$25,000PercentofHHearning$25,000to$75,000PercentofHHearninglessthan$75,000Population

Percentusingpublictransportation

Percentofpopulation65andoverminusthepercent18andunderManufacturing(shareofemployment)

Distancetonearestcityacrossstateborder(m)Countydummy

TIFallowedbystategovernmentin1999StatetaxrevenuepercapitaStatecorporatetaxrateStatesalestaxrate

StatepersonalincometaxrateStatecorruptionrate

Note:Thedatasummarizedinthistablecharacterizethe1022AmericanmunicipalitiesandcountiesprovidingusablerepliestotheICMAsurveyinFall1999andSpring2000.Thedummyvariable‘‘Offeranyincentive’’takesthevalue1ifacommunityreportsofferinganykindoftax-ornon-taxbusinessdevelopmentincentive,andiszerootherwise.Thedummyvariable‘‘Offeranytaxincentive’’takesthevalue1ifacommunityreportsofferingtaxabatements,taxcredits,orTIFs,andiszerootherwise.Thedummyvariable‘‘Offertaxabatement,’’takesthevalue1ifacommunityreportsofferingtaxabatements,andiszerootherwise.Thedummyvariable‘‘Offertaxcredit,’’takesthevalue1ifacommunityreportsofferingtaxcredits,andiszerootherwise.Thedummyvariable‘‘OfferTIF,’’takesthevalue1ifacommunityreportsofferingtaxincrement?nancing,andiszerootherwise.‘‘Medianhouseholdincome’’isdrawnfromthe2000CensusofPopulationforeachcommunityrespondingtotheICMAsurveyandrepresents1999income;‘‘PercentofHHearninglessthan$25,000’’isthepercentageofcommunityhouseholdsearninglessthan$25,000asreportedinthe2000CensusofPopulation;similarly,‘‘PercentofHHearning$25,000to$75,000’’isthepercentageofcommunityhouseholdsearningbetween$25,000and$75,000asreportedinthe2000CensusofPopulation,and‘‘PercentofHHearninglessthan$75,000’’isthepercentageofcommunityhouseholdsearninglessthan$75,000asreportedinthe2000CensusofPopulation.‘‘Population’’ofICMArespondentsisdrawnfromthe2000CensusofPopulation.‘‘Percentusingpublictransportation’’isthefractionoftheworkingpopulationusingpublictransportationtocommutetoworkin2000,asreportedtothe2000CensusofPopulation.‘‘Percentofpopulation65andoverminusthepercent18andunder’’isthedifferencebetweenthefractionofacommunity’spopulation65yearsandolderandthefraction18yearsandyounger,asreportedinthe2000CensusofPopulation.‘‘Manufacturing(shareofemployment)’’isthefractionofacommunity’sworkforceemployedinmanufacturing,ascalculatedfromthe2000CensusofPopulation.‘‘Distancetothenearestcityacrossstateborder(meters)’’isthedistance,inmeters,totheclosestcityortowninanotherstate,calculatedonthebasisofcitycentersusingArcGIS,andlimitedtothe988observationsforwhichprecisegeographiccodescouldbematchedtocommunitiesintheICMAsurvey.‘‘Countydummy’’takesthevalue1ifacommunityisacounty,andzerootherwise.‘‘TIFallowedbystategovernmentin1999’’takesthevalue1ifthestateinwhichacommunityislocatedhadstatutespermittingTIFusein1999,asreportedbytheCouncilofDevelopmentFinanceAgencies(2008),andiszerootherwise.‘‘Statetaxrevenuepercapita’’istheratiooftotalstatetaxrevenuein1999tostatepopulationonJuly1,1999,bothasreportedintheUSCensusAnnualSurveyofStateGovernmentFinances.‘‘Statecorporatetaxrate’’isthetopstatutorystatecorporateincometaxratein1999asreportedintheWorldTaxDatabase(Of?ceofTaxPolicyResearch,2008)forthestateinwhichacommunityislocated.‘‘Statesalestaxrate’’isthegeneralstatesalestaxratein1999asreportedintheWorldTaxDatabase(Of?ceofTaxPolicyResearch,2008)forthestateinwhichacommunityislocated.‘‘Statepersonalincometaxrate’’isthetopstatutorystatepersonalincometaxratein1999asreportedintheWorldTaxDatabase(Of?ceofTaxPolicyResearch,2008)forthestateinwhichacommunityislocated.‘‘Statecorruptionrate’’isthenumberofpublicof?cialsinthestateinwhichacommunityislocatedconvictedoffederalcorruption-relatedcrimesbetween1990and2002,per100,000stateresidents(measuredastheaverageof1990and2000statepopulationreportedintheCensusofPopulation),asreportedbyGlaeserandSaks(2004).

north-central,31%fromthesouth,and24%fromthewest.EverystateotherthanAlaskaandHawaiiisrepresentedamongtherespondents.TheICMAreportsthatresponseratesdifferedverylit-tlebymetropolitanstatus:32%ofsurveyedcentralcitiesprovidedresponses,31%ofsurveyedsuburbsresponded,and31%ofinde-pendentjurisdictionsresponded.Responserateslikewisedifferedlittlebyjurisdictionsize,with28%ofjurisdictionswithpopula-tionsbetween10,000and50,000responding,29%ofjurisdictionswithpopulationsover1millionresponding,andslightlyhigherre-sponseratesforthosewithpopulationsbetweentheseextremes.Despitetheapparentlysomewhatuniformresponsebehavior,anempiricalanalysisofthistypehasthepotentialtodrawincor-rectinferencesifthelikelihoodofrespondingtothesurveyisasso-ciatedwithparticularpatternsofjurisdictionalcharacteristicsandincentiveprovisionbehavior.Sinceitissimplynotknownonwhatbasisjurisdictionsrespondtothesesurveys,itisdif?culttoruleoutpotentialbias,whichshouldbeborneinmindininterpretingtheempirical?ndings.

Distances(inmeters)fromthecenterofeachjurisdictiontothecenterofthenearestplace(asde?nedbytheNationalHistoricalGeographicInformationSystem)locatedinanotherstatewerecal-culatedusingArcGIS.Amongthejurisdictionsinthesample,http://wendang.chazidian.comr-mationontopstatutorystatecorporatetaxrates,statesalestaxrates,andstatepersonalincometaxrateswasdrawnfromtheWorldTaxDatabase(Of?ceofTaxPolicyResearch,2008).Totalstatetaxrevenuepercapitawascalculatedusing1999statetaxrevenueandpopulationdatafromtheUSCensusAnnualSurveyofStateGov-ernmentFinances.CorruptionrateswereobtainedfromGlaeserandSaks(2004),whoreportinformationonratesatwhichfederal,stateandlocalpublicof?cialsineachstatewereconvictedoffederalcor-ruption-relatedcrimesbetween1990and2002;their?gurescorre-spondtototalconvictionsper100,000stateresidents(measuredastheaverageof1990and2000Censuspopulations)overthis13-yearperiod.AdummyvariableindicatingwhetherastatepermitteditslocaljurisdictionstoofferTIFsin1999wascreatedusinginforma-tiononstateTIFstatutescompiledbytheCouncilofDevelopmentFi-nanceAgencies(2008).SincehighlymotivatedcommunitieswereabletoavoidstateTIFrestrictionswithcreativepolicies,theTIFpro-hibitionsarenotabsolute;andindeed,ofthe346communitiesthatreportofferingTIFsin1999,14arelocatedinstatesthatarecodedasprohibitingTIFs.

Theanalysisthatfollowsinvestigatestheextenttowhichthesecommunityandstatecharacteristicsareassociatedwithprovisionofbusinessdevelopmentincentives.Samplesizesvarydependingonspeci?cation,andtodateithasbeenpossibleto