This
study evaluates state and local economic development incentives in Indiana. The
goal is to examine the type, scale, and effectiveness of state and local tax
incentives and to provide recommendations for policy or administrative
adjustments as warranted.
We
conduct this analysis in two parts. The first is a descriptive analysis of
state and local tax incentives in Indiana and a brief outline of incentives in
selected states with which Indiana may compete for new business investments. In
the second section, we conduct an empirical assessment of Indiana tax
incentives using data from individual projects 2005-2010.
We
evaluate state tax incentives using two different empirical approaches. The
first is a panel analysis that tests the effect of the dollar value of IEDC and
local incentives on measures of total jobs, total new hires turnover, and
average (mean) monthly earnings across all industry sectors in Indiana counties
from 2005 through 2010. We use two identification strategies that attempt to
remove endogeneity bias. We find one job created for each $6,000 to $8,000 in
state and local incentives offered. While earnings are statistically meaningful,
they translate into an increase of about $1.60 in monthly mean earnings across
all sectors for each $100 million in tax incentives, which is sufficiently small
to be viewed as zero for policy purposes.
The
second approach is a cross-sectional analysis that allows for a more detailed
examination of individual incentives. Here we find that job creation from IEDC’s
EDGE credits ranges from 5.3 jobs to 6.1 jobs per $1,000 incentive. For local
tax abatement values, we calculate that each $1 million in abated property
value would result in a one-time increase of 7 to 8 new jobs over a 10-year
period. Isolating these effects to only manufacturing employment, yields lower
effect- a onetime increase of one manufacturing job attributable to $1 million
in abated property value (as much as$30,000 per job), and one manufacturing job
created for each $1,000 in EDGE credits. We also find that regions with
Regional Development Authorities tend to grow faster than those places without
RDAs in Indiana.
We
note that the changing nature of tax incentives in Indiana, as in most states,
makes a full evaluation impossible. In this analysis we have data on EDGE and HBI
credits from among the suite of current incentives.
We
note that sparingly used programs may not yet have accrued enough experience
for a full evaluation to have taken place.
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