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Hastings Business Law Journal

Abstract

Federal subsidies to state and local governments have been substantially reduced due to public opinion prioritizing the reduction of the federal deficit, the recent "fiscal cliff" legislation, and the federal budget "sequester cuts." In addition, in many states, revenue collection from individual and corporate income tax is below prerecession levels. To address the reduction in federal funding and reduced revenue collections, state and local governments will increasingly rely on economic incentive programs to grow their economies through increased job creation and private capital investment within their jurisdictions. These economic incentive programs are no longer comprised of simple tax reductions for companies seeking expansion or relocation, but include financial incentives and direct investment programs. The cost of these incentives, both in expenditures and forgone tax revenue, represents a growing portion of state and local governments' budgets and may subject them to steep budget deficits if the incentives do not produce net economic growth.

Because of the budgetary risk and the increased reliance on these economic incentives, there is a need for state and local governments to account for the cost of these incentives and to measure their effectiveness. Effective state economic development requires growth in state economic activity that results in a net increase of revenue in relation to the cost of the incentives. To measure effectiveness, state and local governments must maintain reliable information on the cost of incentives, -institute mechanisms to limit or cap the costs of incentives, and hold businesses accountable for performing pursuant to incentive agreements.

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