Effectiveness of Tax Incentives for Businesses in the U.S. (2020–2025)
Business tax incentives — credits, deductions, accelerated depreciation and targeted subsidies delivered through the tax code — expanded rapidly during the pandemic and then pivoted toward industrial policy and clean energy. This page evaluates what the evidence says about behavior change, jobs, investment and budget impact, and why many programs underperform without tight design and enforcement.
What counts as a “business tax incentive” (and how to judge it)
A business tax incentive is any provision that reduces a firm’s tax liability conditional on an activity (hiring, R&D, investment, location, production, training) or status (industry, size, geography). The key policy question is not whether the incentive is popular, but whether it produces additional economic activity that would not have happened otherwise — at a cost that makes sense for taxpayers.
Effectiveness = “incremental outcomes” ÷ “public cost”. If a credit mostly subsidizes actions firms would take anyway (high “deadweight”), the cost per net job or net dollar of investment can be very high.
In practice, rigorous evaluation answers four questions:
- Additionality: did hiring/investment/R&D increase relative to a credible counterfactual?
- Targeting: are benefits concentrated in firms/sectors with high spillovers (innovation, supply chains, export potential)?
- Accountability: are there measurable performance metrics, reporting, and clawbacks for non-compliance?
- Administrative reality: can agencies verify eligibility and prevent abuse without crushing compliance costs?
2020–2025 timeline: why incentives looked “big” but results often looked “small”
From 2020 to 2025, the U.S. used tax incentives for two very different goals: emergency stabilization during COVID-19, and then longer-run restructuring (clean energy and manufacturing). Those goals imply different designs: emergency programs tend to trade precision for speed, while industrial-policy credits need durable rules, verification, and long time horizons.
2020–2021: stabilization incentives (speed first, leakage later)
Pandemic-era supports combined forgivable loans (PPP) with tax credits (notably the Employee Retention Credit, ERC). Programs were implemented quickly, which improved take-up — but increased improper claims and “paying for what would have happened anyway.”
Evidence summary: PPP allocated over $525B (large one-time scale), and research finds measurable job-preservation effects but also substantial targeting challenges; ERC costs were revised sharply upward over time and the IRS later paused processing due to abuse risk.
2022: shift toward clean energy & domestic manufacturing
The Inflation Reduction Act (IRA) expanded and extended clean-energy tax credits and introduced new production and investment incentives. Unlike short-run relief, these credits aim at multi-year capital formation and supply-chain localization.
Evidence summary: initial public “headline” estimates were later revised upward by budget analysts as uptake increased and some credits proved effectively uncapped.
2023–2024: evaluation culture improves at the state level
More states formalized incentive evaluations and tightened reporting. The quality varies, but the direction is clear: incentives are increasingly treated as budget expenditures that require performance verification, not as “free” tax cuts.
Evidence summary: leading research estimates state and local business tax incentives at at least $30B per year on average, with distribution highly concentrated among a very small share of firms.
2025: TCJA-related business provisions and the “extension” debate
Attention shifted to expiring and phasing provisions associated with the 2017 tax law and the fiscal constraints implied by persistent large deficits. The policy debate increasingly frames incentives as trade-offs against enforcement capacity and long-run debt dynamics.
Evidence summary: nonpartisan budget trackers and CBO reporting show large deficits in the mid-2020s, sharpening scrutiny of any incentive that lacks clear net benefits.
Summary table: major incentive phases and what the evidence suggests
This is a high-level synthesis. “Cost scale” reflects widely cited program/credit magnitudes (some are one-time program authorities, some are multi-year credit costs). Use the Sources section for underlying documentation.
| Period | Prominent tools | Cost scale | Effectiveness snapshot |
|---|---|---|---|
| 2020–2021 | PPP (forgivable loans), ERC (payroll tax credit) | PPP: >$525B allocated; ERC: costs revised sharply upward over time | Meaningful job-preservation effects, but substantial leakage and elevated improper-claim risk (especially for ERC) |
| 2022 | IRA clean energy & manufacturing credits | Initial estimates later revised upward by budget analysts as uptake increased | Stronger logic for spillovers (capacity, supply chains), but complexity and timing matter |
| 2023–2024 | State evaluation reforms; ongoing credits (e.g., WOTC, R&D) | State/local incentives: at least ~$30B per year (research estimate); WOTC certification scale ~2M workers (older CRS data) | Evaluation improves design (metrics, eligibility, clawbacks); many hiring credits show limited net job creation |
| 2025 | Debate on expiring/phase-out provisions; deficit constraints | Large deficits in mid-2020s sharpen scrutiny of low-accountability incentives | Policy focus shifts to “pay-for” logic, enforcement capacity, and measurable outcomes |
Figure 1. Cost scale of selected business incentives and incentive categories (selected references)
To avoid false precision, the chart compares scale across major programs and categories using the units each source reports (one-time allocation, projected cumulative cost, 10-year estimate, or annual baseline). Interpret it as “order of magnitude,” not as a single unified budget series.
Cost scale (fallback)
Chart.js is unavailable, so a simplified visualization is shown. Values are the same as the dataset used for the chart.
Notes: PPP refers to 2020 allocated amount; ERC reflects a projected cumulative cost (revised upward vs initial scores); IRA clean-energy credits use a 10-year estimate; state/local incentives use an “at least” annual research estimate.
Critical assessment: why incentives often underperform
The same pattern repeats across programs: the more a credit is uncapped, poorly verified, or weakly tied to performance, the more likely it is to generate large fiscal cost with limited incremental outcomes. Below are the five factors that most consistently explain gaps between policy intent and results.
1) Behavioral impact (“deadweight”): If firms would have hired/invested anyway, the public is paying for non-additional activity.
2) Spillovers vs displacement: Incentives can create net gains in tradable/high-spillover sectors, but local subsidies often just reshuffle activity.
3) Fiscal cost and opportunity cost: Credits reduce revenue; when deficits are high, the benchmark for “worth it” rises.
4) Design and enforcement: Clear metrics, reporting, and clawbacks outperform vague “job creation” promises.
5) Equity and concentration: Benefits frequently skew to large firms with sophisticated tax capacity, leaving small firms under-served.
FAQ: business tax incentives in plain language
Do tax incentives actually create new jobs, or just subsidize existing ones?
It depends on targeting and verification. Programs tied to clear, auditable outcomes (and enforced clawbacks) are more likely to create net jobs. Broad credits with loose eligibility often show meaningful take-up but weaker additionality.
Why did ERC costs get revised upward so dramatically?
As claiming windows stayed open and third-party promoters expanded filings, the volume of claims increased and concerns about improper claims grew. The IRS responded with processing pauses and intensified compliance actions.
Are state and local incentives “cheaper” than federal incentives?
They can look smaller individually, but in aggregate they are large and persistent. Research estimates state/local business tax incentives at least tens of billions per year, and disclosure is uneven, which complicates evaluation.
What is the most reliable way to measure effectiveness?
Compare outcomes for similar firms/places that did and did not receive the incentive (a credible counterfactual), then compute cost per net job (or per net dollar of investment/R&D) and test whether benefits persist after incentives end.
What design changes usually improve results?
Three changes consistently help: (1) clear performance metrics, (2) automatic reporting requirements, and (3) clawbacks for underperformance. Capping exposure and narrowing eligibility to high-spillover activities also improves cost-effectiveness.
Methodology: how this page evaluates “effectiveness” (2020–2025)
This is an evidence synthesis page. It does not compute a single ranking score; instead it compiles high-quality public documentation on program scale, implementation issues, and what evaluation studies find about incremental outcomes.
Step 1 — Define outcomes. Jobs retained/created, private investment, innovation (R&D), and fiscal cost.
Step 2 — Prefer causal evidence. Studies using credible counterfactuals (e.g., eligibility cutoffs, quasi-experiments) are prioritized over descriptive claims.
Step 3 — Separate “scale” from “effectiveness.” A large program can be poorly targeted; a smaller one can be highly cost-effective if tightly designed.
Step 4 — Document limitations. Many incentives have incomplete disclosure, mixed accounting units (one-time vs annual vs multi-year), and shifting rules.
Data coverage and limitations
- Mixed units: some sources report one-time allocations, others multi-year credit costs or annual baseline spending. The chart is intentionally “order of magnitude.”
- Revisions are common: official and semi-official cost estimates change as uptake and enforcement evolve (especially for uncapped credits).
- State/local disclosure gaps: program totals vary by reporting quality; “at least” estimates should be treated as conservative.
- Not legal/tax advice: this page is for policy understanding and education.
What this means for readers (interpretation & practical context)
If you are a business owner, taxpayer, or analyst reading debates about “new credits” or “extending incentives,” the core question is usually not whether a policy is pro-business, but whether it is designed to buy measurable incremental outcomes at a reasonable public price.
Three takeaways that hold across 2020–2025
- Emergency incentives leak. Speed helps survival, but it also increases improper claims and subsidizes activity that would have continued.
- Industrial-policy credits need governance. Large multi-year credits can reshape investment only if rules are stable, verification is real, and bottlenecks (permitting, workforce, supply chains) are addressed.
- Evaluation is a policy lever. Requiring reporting, benchmarking, and clawbacks often improves outcomes more than “raising the dollar amount.”
In 2025-era fiscal conditions, incentives increasingly compete with enforcement capacity and debt sustainability. That pushes policymakers toward tighter eligibility, caps, and performance-linked designs.
Sources (official / institutional)
Links below are primary references used for the factual claims and scale comparisons on this page.
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IRS — Employee Retention Credit (ERC) overviewhttps://www.irs.gov/coronavirus/employee-retention-credit
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Penn Wharton Budget Model (PWBM) — estimated cumulative cost of ERChttps://budgetmodel.wharton.upenn.edu/issues/2025/9/10/the-cost-of-the-employee-retention-tax-credit
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U.S. Department of the Treasury (PDF) — PPP research / job-preservation evidencehttps://home.treasury.gov/system/files/226/Treasury-EP-Working-Paper-2020-01B.pdf
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Congressional Research Service (CRS) — Work Opportunity Tax Credit (WOTC) reporthttps://www.congress.gov/crs-product/R43729
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Princeton (Zidar et al.) (PDF) — state & local business tax incentives (“at least $30B/yr”) and concentrationhttps://zidar.princeton.edu/document/100
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CBO (reported via Reuters) — revised cost estimate of IRA clean-energy tax subsidies (10-year)https://www.reuters.com/business/energy/us-clean-energy-tax-subsidies-cost-825-billion-over-10-years-cbo-says-2025-01-17/
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CBO — Monthly Budget Review (FY2025) (official deficit reporting)https://www.cbo.gov/publication/61307
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CRFB — deficit context (rolling deficit and % of GDP)https://www.crfb.org/blogs/12-month-rolling-deficit-19-trillion-july-2025
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Brookings — discussion of TCJA provisions expiring/phasings around 2025https://www.brookings.edu/articles/which-provisions-of-the-tax-cuts-and-jobs-act-expire-in-2025/
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Tax Policy Center — IRA IRS funding allocation and tax gap contexthttps://taxpolicycenter.org/briefing-book/what-tax-gap
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National Taxpayer Advocate (IRS watchdog) — ERC processing moratorium discussionhttps://www.taxpayeradvocate.irs.gov/news/nta-blog/the-erc-claim-period-has-closed/2025/05/
Download dataset & charts (ZIP)
CSV/XLSX table + exported chart images used on this page.
- summary-table.csv and summary-table.xlsx
- figure-1-cost-scale.png and figure-1-cost-scale@2x.png
- README.txt (notes and values)
