Redundant, Redundant, Redundant: Economic Development Incentives


I have taken a break from blogging in my move from George Washington University to the University of Texas. I’m back!  Hello?  Anyone there?

My previous research (with many co-authors including Eddy Malesky) has looked at the use of economic development incentives to attract jobs.  In two published papers we argue that politicians use incentives to take credit for economic development and this leads to the overuse of incentives.

My big criticism of incentives are they are often redundant.  Incentives are tax breaks or grants to induce firms to relocate, expand or stay put.  But academic research shows that the majority of firms would have made the same decision (relocate, expand, or stay) even without incentives.  In these cases, incentives are just a transfer of tax payer funded benefits to firms for no new economic activity.

Two stories this week reiterate this redundancy.

First, ConAgra chose to relocate from Nebraska to Chicago despite Chicago offering less than half of the economic development incentives.  A company taking a smaller incentive offer isn’t a smoking gun that incentives weren’t effective.  More telling are the CEOs statements saying that these were not pivotal in the investment location decision.

“The decision to move headquarters was solely based on the strategic needs of our business and was not a city-vs-city exercise.”

According to newspaper reports, this didn’t stop the company from claiming to government officials that incentives were necessary and used creative accounting to get around an Illinois policy freezing new economic development incentives.  According to the Omaha World Harold:

But documents newly obtained by The World-Herald also show that ConAgra officials told the Illinois state government a different story in the months prior to its announcement.

ConAgra told Illinois officials that tax incentives were needed to justify moving its offices to Chicago. Illinois officials must have been convinced. They found a way around a statewide moratorium on incentives the governor had recently imposed because of a budget crisis in Illinois.

In short, prior to moving the company did everything possible to maximize their incentive tax.  After the deal was struck the company claimed that these incentives weren’t necessary.

Second, Marriott international moved its headquarters to Bethesda, MD with $62 million in economic development incentives.  This is a big deal and the new economic activity for a corporate location could have a major economic development impact.  Where did they move from?  From four miles down the road in Maryland.

A short move like this isn’t a smoking gun that incentives weren’t important.  It is plausible that the company could have moved to DC or Virginia with the right deal.  What is more revealing is this paragraph from the Washington Post:

Officials in D.C. and Virginia discussed a pursuit of Marriott, but it’s unclear how aggressively they pushed. Leaders in both jurisdictions remained wary about chasing a company they viewed as likely to remain in Maryland, according to officials familiar with the process were not authorized to discuss it.

It certain sounds like incentives were redundant in both cases.

I have a short podcast at the Scholars Strategy Network on the topic if you are interested.