Does Transparency Improve Public Policy? Evidence From a Tax Incentive Transparency Initiative

ABSTRACT Tax incentives for business investment, a common economic development policy tool, are often criticized as bad policy but good politics: they aren't cost‐effect strategies to attract investment or create jobs, but offer electoral returns for politicians who give them out. Building on the literature on the “fiscal illusion,” we theorize that making the costs of incentives transparent will reduce policymakers' use of them. To test this theory, we leverage a unique policy change—GASB 77—that required local governments in the United States to begin reporting the costs of their tax incentives. Using a difference‐in‐differences design, we estimate that GASB 77 had no discernible effect on local governments' use of tax incentives. Why did transparency fail to improve governance? Results of multiple elite surveys, elite interviews, and heterogeneity analyses suggest that transparency is only effective in the presence of pressure groups that can use the disclosed information to hold elected officials accountable.