Urban Research Monitor
The Recent Literature on Tax Incentives

Although all three reports cover the pros and cons of economic development incentives, Bidding for Business is devoted exclusively to this subject. All three reports come to the same conclusions about this approach to urban revitalization—because business taxes represent such a small part of the cost of doing business, they have little impact on whether a business chooses to locate in one metropolitan area or another. But once a business narrows its selection to a particular metropolitan area, taxes then can become an important factor in swaying a business to pick one particular jurisdiction over a neighboring one because the number of locational factors has been reduced (i.e., within a metro region, all jurisdictions will have a set of characteristics and amenities in common—the most obvious being weather).

Bidding for Business analyzes one metropolitan region’s (Detroit’s) experience using economic development incentives over a 23-year period. Using a regression analysis, the Upjohn Institute authors show that, in the beginning, an entrepreneurial jurisdiction offering a tax incentive can be successful in steering businesses and reducing unemployment rates. Unfortunately, after a while a copycat phenomenon takes over, and everyone else in the metropolitan area begins offering competing economic development incentives that neutralize the effectiveness of the original idea. In fact, there is a net revenue loss to the entire region as a result of an across-the-board depression of business taxes.

Is it ever efficient for communities to offer economic development incentives? “Bidding for Business” indicates it is, but the incentives must be regulated along the lines of enterprise zones in which tax breaks can be targeted only to high-unemployment and fiscally blighted areas.

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