Poster #52 - The Unequal Race: Fiscal Competition and Widening State Income Gaps

• In Event: Friday Poster Reception

Abstract

States invest billions of dollars annually in tax incentives to attract business and create jobs, making these fiscal tools one of their largest categories of tax expenditure. However, the impacts of tax incentives on whether it achieves its intended goals was unclear. Some opponents of these policies called tax incentive as corporate welfare for political gains (Jensen & Malesky 2018), while proponents claimed that those incentives are needed to keep the states competitive with others. In its report, Pew Charitable Trusts (2017) showed that only 10 states with well-designed evaluation plans for those tax incentives for jobs and growth while 18 were in progress and 23 trailed behind. Meaningful evaluations are critical to help state governments to maximize the values of their tax dollars.

Within the fields of public management and finance, the debate over tax incentives continues, specifically through two competing perspectives found in the public finance literature. The first views inter-jurisdictional competition as a benefit force to compel government officials to make efficient decisions. This viewpoint is built on the Tiebout model (1956), Leviathan theory (Niskanen 1971), and the public choice literature (Brenan and Buchanan 1977). The second views inter-jurisdictional competition as a source of distortion in public choices. To become more competitive, the governments often try to lower tax rates, causing insufficient funding for public services – the phenomenon which often referred to as “a race to the bottom” (Oates 2001; Oates and Schwab 1987). To complicate the matters, the data limitation and the various nuance of tax incentives and how it differs among different states caused hurdles for research. As frequently, research articles often focus on one policy (i.e. Tax Increment Finance or tax rebate), or limit to one geographical area (New York, Chicago metropolitan, etc.).

This study examines the impacts of fiscal competition on state economic and social outcomes. Using the comprehensive Panel Database on Incentives and Taxes for economic development (PDIT) and the state in-out migration data from 2000-2015, I investigate the impacts of tax incentive (explicit form of fiscal competition) and state out-migration (implicit of fiscal competition – “voting with your feet”) on state economic development, measured by State Gross Product (GSP) and on state social outcomes, measured by three state income inequality indices - Atkinson index, Gini index, and Theil index. One of the advantages of using PDIT data is that the data cover a wide range of tax incentives for over 45 industries in 33 states and the data is reported as a simulated value of an incentives as value-added of a firm. This uniqueness of the data enables the study to overcome the discrete description of a policy or a location, or a dummy-coded yes-no variable, but provide a comprehensive evaluation of wide-range of tax incentives in more meaningful ways. The preliminary findings show that state fiscal competition might have positive impacts of state economic growth but can cause unintended consequences on widening income inequality. This study contribute to the fiscal competition literature and hold implications for the public management of economic development incentives.

Author

• Trang Hoang, Texas A&M University
  Presenting Author