The state role in economic development policy has
increased as the federal government has devolved selected
programs to balance growth and incomes
among different part of the country. Rapid growth in
coastal states and the suburban areas around many
cities, and stagnation or decline in areas that have remained
rural has intensified economic development
debate. Within the broad spectrum of economic development
policy, significant resources are focused on
state industrial recruitment through tax abatements.
This article uses the Michigan experience to illustrate
how current application of tax abatements may increase
geographic income inequality, and that some
adjustment in the policy would be needed if policy
makers want to rectify the unequal distribution of tax
expenditure. We also argue that localities have few
incentives to reject or limit, which can lead to overuse
of the tool. Relatively straightforward countervailing
measures such as a cap on per capita use of abatements,
together with payments to localities that do not
use their quota of abatements, could improve the effectiveness
of overall state economic development policy
by increasing the level of local public debate about
the use of abatements and making funds available for
alternatives to tax abatements