Anderson Economic Group Work

The Economic Impact of Business Tax Credits in Tennessee

State and local governments have a range of policy tools at their disposal to encourage economic growth, increase wages, and create jobs for local residents. Targeted tax credits for businesses are one of the most common policy tools used to accomplish these goals. In particular, many state governments offer business tax credits that are directly tied to new hiring or investment in the state, especially when that hiring or investment occurs in economically depressed areas.

While business tax credits and grants that encourage expansion or relocation have grown across the country over the past several decades, their effectiveness is not guaranteed and depends on their structure and implementation. Unfortunately, according to the Pew Charitable Trusts, “lawmakers often approve or continue incentives without knowing their potential cost or whether they are working. State leaders need better information to avoid unexpected budget challenges, identify effective incentives, and reform or end programs that are not meeting expectations.” To ensure that business tax credits are effective and efficient at improving the state’s economy, states should learn from best practices in other states and regularly evaluate the impact of the tax credits they provide.

The State of Tennessee has been working to improve its business incentives since at least 2013, when it was chosen by Pew and the Center for Regional Economic Competitiveness (CREC) as one of seven states to participate in an assessment of business incentives policy and practice. During that assessment, Tennessee was identified as a leader in due diligence, agency coordination, and data transparency. The assessment also identified several opportunities for improvement. The State has already acted on several of those opportunities, including by proactively removing some credits that were ineffective. A further opportunity that arose from the assessment entailed the establishment of a process to evaluate the effectiveness of all economic development incentives.

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