The Effect of State Tax Incentives on Economic Growth and Firm Location Decisions: An Overview of the Literature

Abstract

This article reviews the tax study literature to assess the state of knowledge about the relationship among taxes, related factors, and economic growth as well as the use of tax incentives to influence business locations. Although tax studies have become increasingly sophisticated, especially during the past decade, they have tended to yield conflicting results regarding whether taxes matter. Some studies focus on costs and benefits of tax incentives, but few look to see whether public monies could have been better spent or whether tax incentives were economically justified. Tax studies offer little guidance to policy makers concerned about fine-tuning tax rates or tax offerings and effectively employing tax incentives as economic development tools.