What Makes an Economic Development Incentive Effective?

Data visualization lets users explore 4 factors that inform costs and benefits

An interactive from

States use economic development incentives to encourage companies to locate or expand. An incentive has benefits for residents when the economic gains it generates, less its costs and any negative effects, are positive. This data visualization illustrates many of the impacts that incentives can have on government budgets and state economies and shows how those effects are influenced by various policy choices. As policymakers and development officials evaluate their incentives, they should keep these factors in mind.
In Depth

Costs

  • How is the incentive paid for?

Incentives can have positive economic impacts, but they also cost money and must be paid for, either with tax increases, spending cuts, or both, all of which can have negative repercussions.

Targets

  • Does the incentive target ‘exporters’?
  • Does the incentive target high-impact companies?
  • Are the recipient companies locally owned?

The economic effects of an incentive depend in part on the characteristics of the company or companies that receive it.

Design

  • When do businesses receive the incentives?
  • Does the program offer customized business services to small and midsize firms?

Certain designs can produce incentives that deliver more benefits to companies for the same cost to government, increasing their effectiveness.

Economic Conditions

  • How high is local unemployment?
  • How readily can housing supply expand to absorb increased demand?

The state of the economy can significantly affect the ultimate impact of an incentive.

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Issue Brief

What Factors Influence the Effectiveness of Business Incentives?

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Issue Brief

What Factors Influence the Effectiveness of Business Incentives?

Policymakers around the country use economic development incentives such as tax credits and exemptions to encourage companies to locate or expand in their state or community, with the ultimate goal of boosting the job prospects and income of local residents.