Association for Public Policy Analysis & Management

The number of state tax-based incentive programs has more than doubled from less than 1,000 in 1999 to nearly 2,000 in 2015. There is, however, little evidence supporting the idea that incentives attract business investments, create new jobs, stimulate an increase in the local demand for goods and services, and give rise to further rounds of economic growth. Why, then, do local governments use these programs despite a lack of supporting evidence? Specifically, with the unique panel database recently released by the Upjohn Institute, this study examines what determines the use of financial incentives—with a focus on socioeconomic factors, government capacity, political factors, industrial composition, and path dependence. Furthermore, this study investigates whether the determinants have changed in the period 2000–2015. Using fixed-effects panel estimates, this study provides evidence that the use of incentives is inversely related to state economic conditions but positively related to the share of manufacturing and path dependence. The knowledge gained from this study can help broaden the understanding of the popularity of tax-based incentives by state governments. In addition, implications for state economic development policy for policymakers are discussed.