Corporate welfare and economic growth

Many American cities use tax incentives and other amenities to attract large companies to their areas, with the hopes of spurring economic growth and employment.However, a recent study indicates that large companies may not boost economic growth, and in fact, may displace other businesses.

William F. Fox and Matthew N. Murray of the University of Tennessee measured economic growth in two groups of both metropolitan statistical areas (MSAs) and county-wide areas: those with the presence of at least one large company (employing at least 1,000 people) and the "control" group, those without a large company. Researchers discovered:

The median MSA with a large company location experienced an employment increase of about 2.36 percent during the 1980s compared with the non-location MSA of 1.84 percent.

However, the county in which the MSA and the large firm was located actually experienced a slower rate than the control counties.

The growth rate of a state's metropolitan area is positively correlated with the growth rate of the state as a whole.

The presence of large companies in a metropolitan area did not have a statistically significant positive or negative impact on economic growth in that area, after controlling for state-wide economic conditions.

The researchers concluded that the race for attracting large companies through local tax abatements and other economic incentives does not necessarily translate into a path of regional employment and personal income growth.

Source: William P. Fox and Matthew N. Murray, Do Economic Effects Justify the Use of Fiscal Incentives? Southern Economic Journal 71, no.1, July 2004.

For study text http://apt.allenpress.com/aptonline/?request=get-abstract&issn=0038-4038&volume=071&issue=01&page=0078

For more on Tax Burden and Fairnesshttp://www.ncpa.org/iss/tax/

FMF Policy Bulletin/02 November 2004