Research and Commentary: State Tax Incentives

Published July 15, 2013

In an effort to strengthen their economies, states have continued to rely heavily on tax incentives, including tax credits, exemptions, and deductions, to encourage businesses to locate, hire, expand, and invest within their borders. Popular examples include film production credits, renewable energy credits, and electric vehicle credits.

States each year dole out a collective $80 billion in incentives and tax breaks for businesses they hope to lure or keep within their borders. Proponents say tax incentives encourage businesses to create jobs and invest in the local economy.

Scott Drenkard, an economist with the Tax Foundation has questioned the effectiveness of tax incentives. “I’m not sure that giving tax incentives is the way to create growth in a state. It certainly lowers the cost of doing business – but at what cost to taxpayers?”

To determine whether policymakers are getting the information they need to understand whether tax incentives are bringing a strong return on investment, the Pew Center on the States reviewed nearly 600 documents from state agencies and legislative committees and interviewed more than 175 policymakers, agency officials, and experts. Research concluded only four states are successfully tracking how effective their incentives are. Twelve states have mixed results for their tracking efforts, and 35 are trailing behind.

It can be difficult to remedy problems in tax incentive programs when spending limits are lacking and costs increasing. For example, when Oregon lawmakers sought to restrict spending on the state’s Business Energy Tax Credit, fiscal analysts projected that even if the credit were permitted to expire entirely in 2011, commitments the state already had made would total $830 million over the next six years.

Peter D. Enrich, professor of state and local taxation at Northeastern University School of Law, asserts, “tax incentives … even when they create significant differentials in tax levels, simply are not large enough to exert substantial influence on business location decisions.” The state and local taxes that businesses must pay generally account for less than 2 percent of their total cost of operating in the United States; therefore, incentives that reduce taxes do not greatly influence business owners’ location decisions.

State tax incentives often fail to live up to their promises to encourage economic growth and are usually given for business and industries with the most political clout. Lawmakers should avoid complicating the tax code by creating new tax credits and exemptions and instead focus on attracting business by simplifying and lowering marginal tax rates.

The following documents provide additional information about state tax incentives.

Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth
Researchers for the Pew Center on the States discuss how states spend billions of dollars annually on tax incentives for economic development. Half of the states surveyed here have not taken basic steps to track whether tax incentives deliver a strong return on taxpayer dollars and provide that information to policymakers.

Map: Film Tax Credits by State, 1992–Present (April 2010)
A map built by the Tax Foundation shows which states have movie production incentives and when they were adopted.

Nebraska Gov. Heineman Criticizes Wind Power Preferences
Karen Dove, a writer for The Heartland Institute, discusses how Nebraska Gov. Dave Heineman does not support the state legislature’s push for giving tax incentives to wind power companies and other expensive renewable power providers. The governor says the state should provide much-needed tax relief to Nebraska families instead.

Research & Commentary: State Incentives for Electric Vehicles
Heartland Institute Policy Analyst Taylor Smith contends state incentives for electric vehicles make for “poor public policy because they encourage rent-seeking, subvert the market’s natural mechanism for matching supply with demand at the correct price, and clash with other government incentives, all of which creates adverse fiscal consequences while providing negligible environmental benefits.”

Avoiding Blank Checks: Creating Fiscally Sound State Tax Incentives
Pew’s analysis of state tax incentives shows policymakers often create tax credits, deductions, and exemptions that do not promote job creation and economic growth and instead raise the risk of budget shortfalls and unplanned spending cuts or tax increases to close them.

Making the Problem Worse: Credits, Credits and More Credits
An editorial in the Florida Times-Union and published on the Tax Foundation Web site discusses the pitfalls of tax carveouts that benefit special interests and politically popular groups.

Weekly Map: Itemized Deductions by State
This map from the Tax Foundation looks at itemized deductions by state as a percentage of income.

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit The Heartland Institute’s Web site at, and PolicyBot, Heartland’s free online research database at

If you have any questions about this issue or the Heartland website, contact John Nothdurft Heartland Institute’s director of government relations at [email protected] or 312/377-4000.