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Chasing Disparity: Economic Development Incentives and Income Inequality in the U.S. States

Published online by Cambridge University Press:  05 January 2021

Joshua M. Jansa Open the ORCID record for Joshua M. Jansa [Opens in a new window]
Joshua M. Jansa*
Affiliation:
Oklahoma State University, Stillwater, OK, USA
*
Corresponding Author: Joshua M. Jansa, Department of Political Science, Oklahoma State University, 233 Murray Hall, Stillwater, OK 74078-1010, USA. Email: [email protected]
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Abstract

Political scientists and policy scholars have traditionally looked at the role of welfare and tax policies in shaping income inequality. Less attention has been paid to the key policy area of economic development. But states spend billions on economic development incentives each year to encourage firms to locate in their state. The few studies that have examined the impact of economic development policy on inequality have found mixed results, and have not considered who shapes and benefits from economic development policy when identifying possible causal mechanisms. I argue that increased incentive spending leads to increased inequality through either a market conditioning effect (incentives disproportionately boost the incomes of top earners prior to taxes) or a redistributive effect (incentives allow wealthy firms, investors, and employees to keep income that would otherwise be taxed and transferred). These mechanisms are tested using data on incentive spending and inequality across the 50 states from 1999 to 2014. The findings demonstrate that incentives increase income inequality via a redistributive effect only. This effect, though, is relatively large, long-lasting, and robust to different measures of incentive spending. Despite using economic development incentives to try to generate greater prosperity, state governments may be inadvertently exacerbating inequality.

Keywords

economic development policyincome inequalitystate politicsmarket conditioningredistribution
Type
Research Article
Information
State Politics & Policy Quarterly , Volume 20 , Issue 4 , December 2020 , pp. 462 - 488
Copyright
Copyright © The Author(s) 2020

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