Graduation Year

2015

Date of Submission

12-2014

Document Type

Campus Only Senior Thesis

Degree Name

Bachelor of Arts

Department

Economics

Reader 1

Janet Smith

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© 2014 Charlie Montgomery

Abstract

State and local governments forfeit over $80 billion in tax revenue each year in order to incentivize businesses to expand operations and create jobs in, relocate to, or refrain from leaving their states. The use of tax incentives has expanded massively during recent decades to include all states and a range of industries. Targeted tax incentives are proven to be an inefficient method of promoting economic growth and job creation, because of the negative impact of public spending cuts that offset the decline in revenue. There is a large disparity between states that do offer large amounts of incentives and those that do not that remains largely unexplained in the literature. Using cross-sectional data from the New York Times, I examine whether this disparity is associated with the political economy or geography of the states, or if it is largely random. I find little support for the political economy and geography hypotheses. A lack of support for the first two hypotheses suggests that the use of business tax incentives is largely random at the state level. I conclude by examining the viability of several proposals for limiting the use of business incentives and suggest more data collection and further research into potential solutions.

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