Targeted Incentives Hit the Mark
White Bear Lake High School
White Bear Lake, Minnesota
The Wild Wild West was a land of gold, buffalo, Native Americans, cowboys,
railroads and economic incentives. Yes, economic incentives. This land
was tamed, not by cowboys, but by towns and railroads built with targeted
incentives from the federal, state and local governments. You can see
from this example that incentives reach deeply into the history of our
country. Today we are confronted with the issue of targeted incentives
by states and whether or not the federal government should ban their use.
It is not an easy question and both sides raise valid points. Opponents
of targeted incentives argue that they are merely being used as a tool
of economic warfare in a zero-sum game enticing big companies from one
state to the next. Proponents of incentives counter that they are a valuable
tool and when properly used spur economic growth and efficiency.
In this essay, I propose that economic incentives should not be banned
by the federal government. I will argue this by showing that targeted
incentives are a great asset to individual states and communities, that
it is not a zero sum game and, finally, incentives should be left to the
states not the federal government to deal with.
Targeted incentives play a key role in the economic development of states
and communities. One need look no further than South Dakota to see the
benefits reaped from them. Up until they started vigorous incentive programs
the population was dropping and they were facing large budget deficits
(Buus 5A). Then in the 1990s pro-business legislation expanded rapidly,
the population increased and they had budget surpluses (Buus 5A). Over
29 public incentives were created with $33 million in exemptions, grants
and loans. Over 10 years an estimated 4,847 jobs will be created and retained
and an estimated $800 million payback in the form of purchased land, construction,
equipment, property valuation, payroll and benefits (Buus 6A). The list
goes on. Kansas City gave incentives in the form of rebates on increases
in property taxes that spurred new construction, expansion in businesses,
new technical companies and an entertainment center to settle down in
Kansas City (Christian R3).
All these numbers speak very strongly for incentives and so do the numbers
in studies of these targeted incentives. A nationwide study of targeted
incentives showed that states that spent more on incentives showed stronger
growth in manufacturing than those that didn't (RoseA2). It showed that
an estimated $10 per worker increase in incentives caused a 12 percent
growth in manufacturing (Rose A8).
These numbers are pushed aside by opponents who argue that these increases
don't reimburse us for the loss in funds that could go to public goods.
I believe, however, that the opportunity cost of these programs is well
worth it. Empirical evidence shows that revenue losses are at least partially
offset by individual income and sales tax increases (Mattey and Spiegel
50). Many of these incentives are also in the form of infrastructure development.
This is a public good that is not limited to the company, it benefits
the entire area. Incentives have given us public schools, land grant colleges,
state universities, hospitals, laboratories and high-tech enterprises
(Rivlin 20). These incentives in infrastructure have also helped bring
the Mall of America to Minneapolis. Without the infrastructure development
the Mall of America could not be (Wieffering l3). Many scorned the incentives
used to help get it started and predicted failure, but it easily made
its projections of 35 million visitors and $600 million in the first year
These incentives are not just part of a zero-sum game, moving jobs from
one state to another. They allow economic development techniques that
spur creation of new jobs and new industry. Incentives can create interfirm
dependencies and rivalries that upgrade economic vitality and competitiveness
as well as investment (Toft 39). These incentives can also be targeted
at small businesses or small technical firms which need loans to grow
and become more efficient (Bartik 44). These incentives are also vital
in allowing states to compete with countries from around the world for
firms which can create new jobs and industry in a state (Friedman 27).
These incentives can also be used in development plans which target missing
ingredients in a local economy (Friedman 25). They can be used to target
firms which would complement each other and form "industry clusters" where
you can exploit "agglomeration economies," which increases
efficiency of production by concentrating these industries in a geographic
location (Mattey 51). In the example of the Mall of America, incentives
were used and yet nearby malls show little reduction in sales. This shows
that the Mall has indeed created a new market and new jobs in Minneapolis.
It didn't. just move jobs around (Wieffering 14). They can also be used
to target. companies which can provide social benefits by adhering to
minimum wages, targeting their employment and following environmental
standards (McEntee 42). Congress has already developed "enterprise
zones" based on this idea (Fox 54). President Clinton has also called
for expansion of enterprise zones and incentives to companies that hire
welfare recipients (Mitchell R9).
Despite this mountain of evidence for incentives, some still demand action
to stop incentives; however, the federal government shouldn't control
incentives, and states are already taking steps to control the existing
problems. Many states are discussing disclosure of the bidding process
for incentives to the public (Fettig 10). Many states are also doing cost-benefit
analysis of incentives such as a study commissioned by Ohio attached to
state incentives (Fettig 18). There have also been conferences to discuss
the mitigation of escalation in incentives such as the Great Lakes Conference
(Fettig 18). States are dealing with the so-called winner's curse by introducing
clawbacks which cut off payments or demand payment back on incentives.
Indianapolis and New York City already have such programs (Phillips A2).
In fact 75 percent of incentive packages now have some form of clawback
There are also many questions as to the federal government's ability
to end targeted incentives. Many believe that states would get around
the laws, and cases challenging incentives would only crowd the courts
(Reich 29). There was also a case in North Carolina where incentives were
challenged as unconstitutional, and it was struck down by the state Supreme
Court (Fettig 15).
As you can see this is a complicated issue. I believe the evidence presented
has shown how well incentives work in individual states and how they can
work in a positive-sum game by increasing efficiency and spurring new
industry. I have also shown that it would be improper for the federal
government to take such drastic measures on an issue states are already
Bartik, Timothy J. "Eight Issues for Policy Toward Economic Development Incentives."
The Region June 1996: 43-46.
Buus, Jim. Letter. "Incentives Don't Just Lure Jobs, They Create Them." fedgazette October
Christian, Shirley. "Kansas City is Rediscovering its Downtown Area."
New York Times 6 October 1996: R3.
Fettig, David. "A Report From the Battlefield." The Region June 1996: 8-15.
Fox, Justin. "The Little Policy Idea That Could."
Fortune 11 November 1996: 54.
Friedman, Miles. "Governments Can Use Incentives Rationally."
Economic Development Review Fall 1994: 25-28.
Mattey, Joe, and Mark Spiegel. "On the Tax Efficiency Effects of Tax Competition for Firms."
The Region June 1996: 50-51.
McEntee, Gerald W. "The Problem With State Bidding Wars and Some Possible Remedies."
The Region June 1996: 41-42.
Mitchell, Alison. "Job Ideas for Inner City." New
York Times 15 Aug. 1996: R9.
Phillips, Michael M. "Localities Force Firms to Keep Promises."
Wall Street Journal 26 June 1996: A2 and AI 1.
Reich, Robert B. "Bidding Against the Future?" The Region June 1996: 26-30.
Rivlin, Alice. "An Economic War." The Region June 1996: 20-2.5.
Rose, Frederick. "Growth Tied to State Incentive Programs."
Wall Street Journal 8 April 1996: A2 and A8.
Toft, Graham S. "Doing Battle Over the Incentives War: Improve Accountability but Avoid Federal Mandates."
The Region June 1996: 37-40.
Wieffering, Eric. "What Has the Mall of America Done to Minneapolis?"
American Demographics February. 1994: 13-16.