Incentives Watch: The Good, the Bad, and the Costly

The old saying goes, “you need to spend money to make money.” Well, for a handful of states that conventional wisdom alone might not be enough anymore. When it comes to awarding tax credits, states want to know just how much they need to spend and what they stand to make for their trouble.

According to The PEW Charitable Trusts, 10 states and the District of Columbia have passed legislation over the last two years requiring the evaluation of their state tax credits. This growing trend among a handful of states highlights a renewed emphasis on the fiscal responsibility and accountability of their tax credits and incentives. These states want to know that the price is fair when they essential give businesses tax revenue to locate or stay within their state.

One need not look far to see the drastic implications that tax credits can have on a state’s budget. For example, Vermont leaves close to $1 billion of tax revenue on the table because of various credit and incentive programs each year.

A major contributor to Michigan’s current budget issues may be the Michigan Economic Growth Authority (MEGA) tax credit program, repealed in 2012. According to an article in Bloomberg BNA’s Weekly State Tax Report, titled “States Examine Tax Incentives; Michigan Takes Budget Hit as Companies Claim Credits,” businesses awarded MEGA credits prior to the program’s repeal continue claiming them, and they may do so as late as 2032, in some instances. Michigan dished out $681 million in tax credits for fiscal year 2015, despite facing a $532 million deficit, as reported by The Detroit News

Alaska is also in the midst of a revenue crisis, although it may be fair to say that other factors are more prominently involved than tax credits. Alaska, faced with rapidly falling oil prices, estimates they will award close to $400 million more in tax credits for the oil and gas industry than they will generate in revenue from their severance tax in fiscal year 2016.

Unlike Vermont and Michigan however, Alaska is among the states that have passed legislation to systematically review their credits and incentives, so a solution may not be too far away.    

So, what can the states do to address the issue? According to The PEW Charitable Trusts, states should decide when and how to evaluating their tax credits and incentives, measure the impact they have on the state economy, and use those results to make informed decisions going forward.

This isn’t to say that all tax credits are bad, or even that all tax credits must provide a positive economic value. Some credits serve a greater social purpose than generating revenue for the state. For example, without low-income housing tax credits, businesses might not be inclined to develop affordable housing. However, a more informed a decision may allow the states to spend a little less and make a little more in the long run.

Continue the discussion on Bloomberg BNA's State Tax Group on LinkedIn: Should more states pass legislation requiring the systematic evaluation of their credit and incentive programs? 

For more information about state tax credits, check out Bloomberg BNA’s Credits and Incentives Portfolios by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today.