You Don't Always Get What You Want: The Effect of Financial Incentives on State Fiscal Health

Abstract

Governments frequently use financial incentives to encourage the creation, expansion, or relocation of businesses within their borders. Previous research on financial incentives have given little clarity as to what impact these incentives may have on the government. While incentives may draw in more economic growth, they also pull resources from the government’s coffers and may commit future funding for public services that benefit the incentivized business. Using a panel of 32 states from 1990 to 2015, we seek to understand how incentives affect a state’s fiscal health. After controlling for the governmental, political, economic, and demographic characteristics of a state, we find that incentives draw resources away from the state. Ultimately, the results show that financial incentives negatively affect the overall fiscal health of a state.