Incentives Watch: State Tax Incentive Review Programs Come of Age

Treasury Building in D.C.

State governments across the country have fallen in love with the use of credits and incentives to spur economic growth and social progress. The last twenty years have seen an explosion of state tax credit programs, including historic rehabilitation/preservation credits, economic development credits, and even individual credits to assist first responders and veterans. But growing with this expansion is concern that states have no way of knowing whether a particular program is working. Reform in this area is picking up steam, and seeks not just to understand the bald dollar value of credits offered but also evaluate the return on investment the state receives. Though most evaluation is done in monetary terms, some states are beginning to look past finances to determine a credit’s effect on homelessness, poverty rates, and educational access. Several recent pieces of legislation seek to obtain this information in order to guide policy makers toward programs that are worth the public’s time and resources. 

Credit Evaluation: Flying Blind?

Current state evaluation of credit offerings is uneven and incomplete. Just 10 states have an established method in place of reviewing major tax incentives, according to a report by Pew Charitable Trusts in 2017. The evaluation was based on three criteria: 1) well-designed plans for regular reviews, 2) experience in producing quality evaluations, and 3) a process for informing policy choices. Too often states merely collect information on the total value of credits offered in a given year, and perhaps the identities of the recipients. States rated as “leaders” in the Pew report seek to understand efficacy, through both achieving the desired result and understanding the cost. 

Examples of the best and worst credit evaluation programs are often available online as public documents. Massachusetts has credit information available through what it calls Tax Credit Transparency Reports. The report lists the amount of each credit approved and claimed, and a list of the recipients. Missing from the report, however, is an analysis of the benefit Massachusetts received through the credit. How many jobs were created? Did the credit increase or reduce business investment? Are there better or less costly ways to offer incentives? Lawmakers must consider these questions but are not presented with the tools they require to make informed decisions. Massachusetts is rated by the Pew report as “trailing” other states in the current state of their evaluation processes. 

At the other end of the spectrum, the Pew report identified Florida as a “leader” for enacting some of the most comprehensive credit review in the nation. Since 2013, the Office of Economic and Demographic Research (EDR) and the Office of Program Policy Analysis and Government Accountability (OPPAGA) evaluate a list of 21 economic development incentives offered by Florida on a rotating three-year basis. EDR is able to provide complex analysis to lawmakers, receiving data from program analysis conducted by OPPAGA. The result is a report that lists not only the state payment but also provides an estimated ROI for each program. The 2014 credit report found that Florida’s enterprise zone program was estimated to have a negative ROI; the enterprise zone credit was given a sunset date one year later. States that gather and maintain sufficient tax credit information have a clear fiscal and economic advantage over states that do not, by focusing on what works and abandoning what doesn’t. 

Progress, Sweet Sweet Progress

Since the Pew report was published, states have made a significant push to overhaul their credit evaluation mechanisms, signaling a more thoughtful and informed approach to tax credit and incentive policy making. Most recently, Connecticut passed H.B. 7316, expanding its annual credit report to include an analysis of performance. The bill contains several changes, including a more in depth tax incentive review, an evaluation of the accuracy of the previous year’s report, and a requirement to provide recommendations concerning improving the current incentive offerings. The evaluation covers credits, abatements, grants, loans, and other forms of assistance intended to improve economic development. Essential to the success of any evaluation is the request for recommendations, which in turn requires actual facts and figures to be collected and analyzed. The changes place Connecticut in a position to overhaul their tax credit and incentive offerings to improve economic development across the state. 

States use such reports for both evaluating financial data and progress on a state’s social initiatives. Illinois recently enacted S.B. 1567, which added a requirement for taxpayers claiming the Economic Development for a Growing Economy Tax Credit to submit a report detailing supplier diversity goals and figures. The goals were originally put in place in 2015 to encourage utilities to increase diversity. The report must include goals and actual spending for female-owned, minority owned, veteran-owned, and small business enterprises in the previous calendar year. The program expands the application of tax credit evaluations to other priority initiatives where previously data was sparse or did not exist at all. 

Much work remains to be done to truly measure the impact and benefits of state tax credits and incentives. States flush with increased revenue due to the 2017 federal tax act (Pub. L. No. 115-97), as well as possible future revenue after the Wayfair decision, may be tempted to expand current incentives. States would do well to check in on their incentives to measure their efficacy before jumping in head-first. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Is competition between states to offer the biggest or best incentive a shot in the arm or a race to the bottom? 

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