The Total Fiscal Effects Index (T.F.E.I.). Building a Dependent Variable to Gauge the Long-Term Fiscal Consequences of Using Economic Discretionary Incentives Packages to Lure Businesses: The Auburn, Huntsville, Montgomery, and Mobile Cases

Abstract

Discretionary economic incentives have been a policy tool widely used by local governments to bring business to their jurisdictions to create jobs and foster economic development. However, businesses have managed to pit local governments against each other and made them compete under the promise of locating within the jurisdiction of the highest bidder. Thus, the winning locality can doom its public finances by elevating its bid through an excessive economic incentive package. That is, by trying to spur a virtuous cycle of economic development, localities can fall into a harmful cycle of economic development. To know if their past decisions were conducive to a fiscal surplus or a fiscal deficit (a winner’s curse outcome), local governments must conduct ex-post (post-award) assessments of the long-run consequences of their granted discretionary incentive packages. To this end, this dissertation shows local economic development managers the first and probably most crucial step in doing such an analysis. Hence, four Alabama localities were selected using a combined snowball/criterion nonprobability sampling strategy, and consequently, a total fiscal effects index was built for Auburn, Montgomery, Huntsville, and Mobile, respectively. This index will be a dependent variable in a later research phase to gauge the fiscal consequences of using discretionary economic incentives packages. The results show that the index is a suitable multidimensional dependent variable capable of identifying trends which can be disaggregated for an in-deep scrutiny. Additionally, the results also show that the index is reliable, and valid.