Tax Subsidy Information and Local Economic Effects

Abstract

We examine whether the relation between business tax subsidies and local economic activity varies based on publicly available subsidy information. State and local business incentives have tripled in size over the past thirty years (Bartik, 2019), now amounting to over 40 percent of total state corporate tax revenues (Slattery and Zidar, 2020). However, the subsidy grant process is notoriously opaque, and transparency problems inhibit clear assessments about whether subsidies achieve their intended outcomes. We find that public information about these incentives – measured based on the existence of state-level subsidy disclosure initiatives, the online publication of subsidy details, and ex ante job commitment disclosures – plays a critical role in subsidy effectiveness. Across all three measures, we observe that the positive association between subsidies and establishments occurs only in those counties with greater information. However, we find that employment effects occur only when the subsidies are accompanied by ex ante job commitments, signaling heterogeneity in the extent to which information facilitates job and wage growth. Our large-scale empirical analysis on the role of public subsidy information provides evidence of an important factor previously discussed, but not empirically tested, in public economics. Furthermore, we offer policy-relevant evidence for the increasing number of states implementing subsidy disclosure regimes.