Syracuse
University
Economics
Andrew Hanson, PhD Candidate
"Poverty Reduction and Local Employment Effects of Geographically Targeted Tax Incentives: An Instrumental Variables Approach"
Abstract:
This paper uses the federal Empowerment Zone wage
tax credit as a natural experiment to assess the effectiveness of
geographically-targeted tax incentives at increasing local employment
and reducing poverty.
Geographically-targeted tax incentives have become a popular tool among
state and federal policy makers despite the limited and contradictory
evidence that exists on their effectiveness.
Using census data on local employment and poverty I estimate the
effects of the wage tax credit by comparing areas that received an
Empowerment Zone to areas that applied for an Empowerment Zone but were
awarded a less generous assistance package (that did not include the
wage tax credit). To isolate the
effect of the tax incentive I compare the economic outcomes of the two
groups relative to the city that they are part of between 1990 and 2000
using census data at the tract level.
To account for the endogenous nature of the EZ designation
process I use an instrumental variables regression.
My instruments for EZ designation are local area representation
on the U.S House of Representatives Ways and Means Committee during the
year of designation and the number of terms a representative of the
majority party served on this committee.
The results of instrumental variables regressions contradict the
standard OLS estimates, and suggest that the tax incentives had no
effect on local employment and poverty rates in the targeted areas,
although this result is statistically imprecise.
I find evidence that the null findings are driven by both
inelastic labor supply of residents and capitalization of the tax credit
into local property values.
To Read the Full Paper Click Here (pdf)
To View Summary Statistics for all Comparison Areas Click Below:
(pdf)