An Examination of the Relationship Between Local Tax Incentives and Diversification of the Local Economic Base

Abstract

While much of the economic development literature attempts to quantify the effectiveness of tax incentives on growth outcomes, less attention has been paid to the relationships between incentive use and local economic base composition, despite the fact that many economic development strategies are aimed at changing industrial base makeup. Local industrial base diversity has implications for the pace and stability of future growth. Using newly available annual data on incentives at the metropolitan statistical area (MSA) level, this article explores the relationship between incentives and economic diversity between 2005 and 2015. The descriptive analysis finds that MSAs with less diverse economic bases target incentives to industries with low concentration and that regardless of overall diversity, MSAs are more likely to incentivize industries that are less specialized locally. Panel regression models indicate that use of customized job training subsidies are associated with increases in diversity net of local government and population characteristics.