Tax and Spending Incentives and Enterprise Zones - Department of ...

zone that might have located elsewhere, not to create
new enterprises from scratch, whatever the rhetoric
may be, and that this is not necessarily a bad aim
(though it may be unattainable for many zones) if the
true objective is to lower unemployment among the
residents of especially distressed small areas.
Incentives and the Basic Policy Structure
The paper notes, correctly, that some of the literature
has focused on differences in explicit incentives,
without recognizing that the states do not have identical
provisions of general tax, spending, and regulatory
policies: An incentive in one place may be part
of a system (tax or nontax) that has been in place
for decades in another place, like the treatment of
business personal property in the different states. This
Discussion
Leslie E. Papke, Associate Professor of Economics,
Michigan State University.
The primary issue Peter Fisher and Alan Peters
address in their paper is the accurate measurement
of the value of state and local economic
development incentives. While the literature already
includes hypothetical firm simulations of after-tax
rates of return that account for federal, state, local
taxes, and some tax credits, Fisher and Peters have
added to this calculation the value of additional tax
and nontax incentives. These incentives include, for
example, credits for job creation, loan guarantees, and
grants. This is no small undertaking.
Their work has important implications for the
consensus formed in recent years about the partial
effect of state tax burdens on industrial activity. Over
the past several years, improvements in both the
measurement of state and local tax burdens and the
econometric techniques applied have led many researchers
to conclude that, for certain industries, an
increase in state and local taxes will lead to a small
decrease in business investment. Most studies have
produced statistically significant estimated elasticities
that range between 0.1 and 0.6. That is, a 1 percent
raises a more fundamental question, the extent to
which state and local economic development policy
should be based on exceptions to the general rules,
rather than broader changes in those rules.
A few years ago, Assar Lindbeck, longtime chairman
of the Nobel Prize in Economic Science selection
committee, wrote these words concerning national
economic development policies in Sweden:
It is not by planting trees or subsidizing tree planting in
a desert created by politicians that the government can
promote ...industry, but by refraining from measures
that create a desert environment (quoted in The Economist,
March 3, 1990).
Those words seem quite relevant to the discourse on
state and local incentives for economic development
in the United States, too.
increase in a state’s effective tax rate is associated with
a 0.1 to 0.6 percent drop in business activity.
Confusion sometimes surrounds the interpretation
of this finding. The academic literature is interested
in, among other things, measuring effects precisely—that
is, the issue of statistical significance. An
important distinction must be made between that
concept and economic significance—the magnitude of
the coefficient. A precisely measured coefficient may
be too small to be of much economic significance. The
The most significant result from
Fisher and Peters’ painstaking
work is the conclusion that the
economic development incentives
serve to accentuate, not offset,
existing state tax differentials.
range of elasticities above suggests that business investment
appears to be relatively inelastic with respect
to state and local tax burdens. However, if Fisher and
Peters were to show that development incentives
systematically work to offset existing state and local
March/April 1997 New England Economic Review 135