State subsidies to businesses have tripled since 1990.

(<< Fact 12: The entrepreneurship rate has fallen by almost half for workers with a bachelor’s degree.)

When a major firm enters a new state or community it can have a substantial impact on the local economy (Greenstone, Hornbeck, and Moretti 2010). As large firms select new communities for additional or relocated facilities, state and local subsidies can be powerful inducements to select one location over another. State and local policymakers have a clear incentive to attract such businesses, and in fact try to do so using a variety of policy instruments, including various tax credits and other subsidies.

Unfortunately, such tailored subsidies place young and small firms at a disadvantage. Typically too small to merit the special attention of state policymakers, these businesses must face relatively high effective tax rates when they compete with larger, more-established businesses who have received incentives.

Figure 13 presents data from Bartik (2017) that document the sharp rise in state and local use of targeted business incentives for export-base industries (businesses that sell outside the local area or compete with goods and services from outside the local area). These incentives—job creation, investment, and R&D tax credits, as well as property tax abatements and job training subsidies—collectively rose from 0.5 percent of business value added in 1990 to 1.4 percent in 2015. Increased use of job creation tax credits alone accounted for 66 percent of the increase. At the same time, the gross tax rate facing businesses declined from 4.7 percent of value added to 3.3 percent, further reducing firms’ effective tax burden (Bartik 2017). Importantly, the data shown in figure 13 understate the extent of business incentives because they do not include the largest subsidies that are provided to firms making investments larger than $100 million.

State and local business incentives are generally considered to be part of a zero-sum contest between jurisdictions, most or all of which would be better off if the use of incentives were categorically eliminated (Chirinko and Wilson 2008). But it is not clear that all incentives even confer a sizable benefit on jurisdictions that use them; carefully evaluated incentives have generally not appeared to be cost-effective (Bartik and Erickcek 2014).

(Fact 14: Occupational licensing is common and associated with diminished worker mobility.)