The Determinants of Tax-Based Incentives: An Empirical Analysis of State Governments

Abstract To determine why state governments often use tax-based incentives, this study focuses on five major tax-based incentives: job creation tax credits, investment tax credits, R&D credits, property tax abatements, and customized job training subsidies. The statistical results indicate that a state government’s prevailing political ideology influences the choice of economic development activities. Accordingly, a more liberal state is less likely to use property tax abatements and customized job-training subsidies, and more likely to use job creation tax credits and R&D tax credits. Further, competition does not operate to trigger tax-based incentives. State economic conditions are not significantly related to the use of incentives. This result could imply the prevalence of political factors in the use of incentives.