The Effectiveness of State Business Tax Incentive Programs: The Case of North Carolina

Abstract

The authors propose a practical way to estimate the effectiveness of state tax incentives. They simulate how much taxpayers'costs are reduced by tax incentives and how those reductions are likely to increase employment. That enables them to address the critical but elusive counterfactual question about the induced rather than gross effects of tax incentives. The importance of this article is not in the elegance of its approach but in its application. The authors demonstrate how a straightforward model can be used to help inform critical decisions that thus far have had little useful input from analysts. Their approach is easily replicable. The simulation results are easy for policy makers to understand. The power of this relatively simple approach has already been demonstrated in North Carolina, where its use is helping to shape tax incentive policy.