The Real Cost of Luring Big Companies to Town

By on March 30, 2018
From CityLab:  Are the economic incentives cities and states offer huge companies worth it for local residents? That depends on who you ask. But for the cities and states vying for Amazon HQ2 by bartering bigger and bigger tax breaks, the answer matters.

New research from Timothy J. Bartik, an economist at the W. E. Upjohn Institute, suggests that while incentives do indeed have benefits for local economic development in the short term, negative effects begin compounding as soon as 22 years into an agreement. It’s public education that suffers most drastically from budgetary reshuffling; and vulnerable low-income populations that are afforded the smallest gains.

“There’s no free lunch,” said Bartik. “The incentives have to be paid for, and the money comes from somewhere.”

Bartik used a model of a typical local economy to find out where, and to put real numbers to some conventional wisdom (and controversial assumptions) regarding economic development agreements.

The first: To what extent are economic incentives even responsible for new job creation at all? Incentives have long been the bread and butter of economic development operations. But they’re not the only thing most cities can or do offer. When companies choose a specific location they probably take a lot more than money into account (like cultural climate, local talent, transit access), and would create a lot of those jobs regardless of how much money it took to lure them. Bartik builds upon previous research to assert that only 10-15 percent of the new jobs companies create in incentive-offering cities and states can really be credited to the incentives they offer.

Once companies get there, however, jobs do follow. Each incentivized job has an average of a 2.5 percent “multiplier effect,” meaning 1.5 additional jobs are created locally for every one job the company itself adds.

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