Competing for Jobs: Local Taxes and Incentives

State and local governments frequently offer tax incentives to attract businesses to locate in their area. Proponents view these incentives as a valuable tool to encourage economic development. Critics, on the other hand, argue either that incentives have little effect on business location decisions—and hence are wasteful giveaways—or that their benefits come at the expense of reduced economic activity in other areas. A key element in this debate is distinguishing what is best from a local versus a national perspective. Late last year the electric carmaker Tesla chose Nevada as the site of its future “gigafactory, ” where it will produce all of the batteries to power its vehicles. The company expects the factory to cost $5 billion to build and to eventually employ around 6,000 people. Tesla cited Nevada’s offer of low taxes as an important factor in its decision to locate there rather than in one of the several other states vying to host the factory. In addition to having no individual or corporate income tax, Nevada enacted a package of tax incentives—including refundable credits for job creation and investment, sales tax exemptions, and property tax abatements—specifically for Tesla to enhance the state’s attractiveness (Damon 2014). The Tesla-Nevada deal is just one of the latest high-profile business location decisions in which state and local tax policy purportedly played a critical role. Such deals tend to stir up renewed interest in the long