ESG and the Demand for State Tax Incentives

This article argues that a business which embeds environmental, social, and governance (ESG) considerations in its strategy should consider whether seeking or accepting targeted state and local economic development incentives (which we refer to as “state tax incentives”) is consistent with that strategy. The outcome of that consideration will vary by locality, incentive package, and strategy. But given the demonstrated negative impact of state tax incentives on government finances and the community, most ESG-minded companies should either forgo them or cooperate with the state in crafting incentives that benefit both the company and the community. A well-crafted ESG reporting standard on this topic can help guide companies towards such win-win incentives and help them credibly communicate their approach to investors and other stakeholders. This article proposes that companies, investors, and governments should lobby ESG standard-setters to create an effective reporting standard, and we offer some recommendations for its characteristics. We believe this is the first article to examine state tax incentives in the context of ESG and the first to suggest that the demand for state tax incentives can be reduced as more companies (and their investors) realize that taking incentives is inconsistent with their ESG strategies. All prior attempts to curtail state tax incentives have targeted the supply of state tax incentives, by seeking to encourage or force states to limit their use. These attempts have been unsuccessful, in part, because they relied on persuading political actors to stop taking actions that they believe are in their own self-interest. In contrast, a demand side, company- and investor-driven approach may be more successful, because applying an ESG framework requires companies to act in their own interest, while better taking into account long-term costs and benefits. This article explains the problems that have resulted from state and local tax incentives and the various failed efforts to curtail them; reviews the emerging concept of ESG; applies the literature on tax avoidance and corporate social responsibility to state tax incentives; provides a basic outline for a state tax incentive ESG reporting standard; highlights the strategic benefits that will accrue to a company that takes a more deliberate approach to deciding whether to seek and accept state tax incentives; and identifies issues at the intersection of ESG and state tax incentives that are ripe for future research