Job Creation Tax Credits, Fiscal Foresight, and Job Growth: Evidence from U.S. States

Authors

Robert S. Chirinko

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2010-25 | November 1, 2016

This paper studies fiscal foresight — alterations of current behavior by forward-looking agents in anticipation of future policy changes – using variation in state job creation tax credits (JCTCs). Nearly half of the U.S. states enacted JCTCs between 1990 and 2007, and their unique experiences provide a rich source of information for assessing the quantitative importance of fiscal foresight. We investigate whether JCTCs affect employment growth before, at, and after the time they go into effect. A theoretical model identifies three key conditions necessary for fiscal foresight, captures the effects of the rolling base feature of JCTCs, and generates several empirical predictions. We evaluate these predictions in a difference-in-difference regression framework applied to monthly panel data on employment, the JCTC effective and legislative dates, and various controls. Failing to account for the distorting effects of fiscal foresight can result in upwardly biased estimates of the impact of the JCTC fiscal policy by as much as 34%. We also find that the cumulative effect of the JCTCs is positive, but it takes several years for the full effect to be realized. The cost per job created is approximately $18,000, which is low relative to cost estimates of recent federal fiscal programs. This figure implies a fiscal multiplier on JCTC tax expenditures of about 1.66.

Article Citation

Wilson, Daniel J., and Robert S. Chirinko. 2010. “Job Creation Tax Credits, Fiscal Foresight, and Job Growth: Evidence from U.S. States,” Federal Reserve Bank of San Francisco Working Paper 2010-25. Available at https://doi.org/10.24148/wp2010-25

About the Author
Daniel Wilson
Daniel Wilson is a vice president in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Daniel Wilson