Are Silicon Valley's business incentives “all cost and no benefit?”
Most tax breaks and perks don’t influence where a company sets up shop. Even when they do, cities usually lose money. Instead, focus on tech-clusters and businesses with multiplier effects, say Timothy J. Bartik and John C. Austin in a Brookings commentary. Furthermore, when it comes to creating jobs, cash handouts are far less effective than investments in business services and infrastructure.
Research suggests that at least 75% of the time, typical incentives do not affect a business’s decision on where to locate and create jobs—they’re all cost and no benefit. Furthermore, even when incentives do tip a location decision, they do not pay for themselves. They may create new jobs, but frequently they also bring in new workers from outside the city or state, which raises costs to public services that offset at least 90% of any increased revenue.
There are possibilities for such well-designed tax incentives. When combined with business services and other smart policies, they can be a cost-effective way to promote inclusive local economic growth.
Do the incentives target the right businesses?
Will the business provide multiplier effects? When the business buys from local suppliers, it helps increase jobs at those companies. Workers employed at the business, too, will buy from local retailers, increasing those jobs.
Do the incentives target the right areas?
Do the incentives target high-tech businesses in an area with an above-average high-tech base? High-tech businesses have additional multiplier effects because they support and spawn other local firms whose workers and ideas flow from one to another. But this only works when the area has a sufficiently large “cluster” of tech firms to build from.
Are they the right type of incentives?
Do they include a healthy share of customized businesses services, or is it all cash giveaways? Business services such as job training, business advice to smaller businesses, and new transportation infrastructure can have job creation effects per dollar that are five to 10 times greater than tax or cash incentives.
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