Economic &Tourism Development

Targeted Tax Incentives

Updated May 15, 1998

Targeted tax incentives are intended to benefit a limited number of tax payers- or even an individual tax payer- to encourage some specific activity. Law providing for these incentives usually are cast in apparently general terms that are, in fact, likely to have narrow or specific application. State governments use such provisions to attract major projects.

The argument for using any necessary means to obtain development is that it brings substantial development without the need for additional incentives. More fundamentally, such incentives allow states to compensate for disadvantageous circumstances that might otherwise discourage companies from locating in that state. Such incentives can offset the costs that companies might face from geographic or work force disadvantages. And, as long as some states offer such policies, all states are under pressure to do so.

The arguments against targeted tax incentives are numerous. They are inequitable and undermine the uniformity of tax law. They will not provide compensatory tax revenue in the short run, and maybe not in the long run. They reduce a state’s ability to provide services at the same time they encourage growth. They may create a competitive disadvantage for companies that do not receive the benefit. And they can allow companies to make non-negotiable demands on state government.

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