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Can State and Local Tax Incentive Programs Spur Job Growth? Empirical Evidence

Joyce Man

Despite the pervasive use of various tax and financial incentive programs by state and local governments for economic development and the commitment of billions of dollars each year in expenditures and foregone tax revenues to fund them, information on their effectiveness is scarce. This study evaluates the effectiveness of four specific tax incentive programs: tax increment financing, enterprise zones, property tax abatements, and real property rehabilitation programs by comparing employment levels before and after the implementation of these programs in a first-difference model. Using data from Indiana cities from 1977 to 1992, this study provides empirical evidence that the tax incentives provided through targeted property tax abatements and tax increment financing programs have statistically significant positive effects on employment growth. It suggests that tax incentive programs that emphasize infrastructure improvements and capital investments in targeted geographic areas are effective in creating jobs and stimulating local economic development in the host communities.

Keywords: Tax Incentives, Effectiveness.

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