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More than 20 states lack comprehensive strategies for monitoring their business tax incentive programs, leaving policymakers without frameworks for understanding the effectiveness of such programs, a new study by the Pew Charitable Trusts revealed.
However, the study released May 3 also found 27 states and the District of Columbia have made significant progress in efforts to evaluate the effectiveness of their economic development tax incentive programs. Leaders in this group operate well-designed programs that:
The shift over the last five years has been “impressive,” Pew said in “How States are Improving Tax Incentives for Jobs and Growth.” Few states met even basic standards for incentive program evaluation, assessment and policy improvement in 2012.
“Across the country, state policymakers are demanding high-quality information on the results of economic development tax incentives,” the report concludes. “More than half of states now have processes in place to regularly evaluate these programs. That represents impressive progress from just a few years ago, when a mere handful of states had them.”
The report breaks the states into 10 leaders, 17 states and the District of Columbia making progress, and 23 states that are trailing. The designations are linked to Pew’s benchmark criteria for states to evaluate, assess and use data to improve their programs.
Josh Goodman, one of the authors of the study, said Pew takes no position on the wisdom or effectiveness of state tax incentive programs. He noted that some state policymakers are wildly enthusiastic about tax credits and exemptions for business development, while others are critical of programs that can be viewed as “picking winners and losers.”
But Goodman said both views benefit from credible, nonpartisan evaluation processes and data.
“The question for states is: What’s the best way to do that? How can we achieve our economic development goals most effectively? What evaluations do is dig into the details of incentives and show what’s working and what’s not, and provide clear guidance to lawmakers about how to do better,” Goodman said during a webinar May 3.
Goodman noted that state and local units of government need to pay attention to their evaluation processes under the recent disclosure requirements imposed by the Government Accounting Standards Board.
GASB Statement 77, issued in August 2015, requires units of government issuing abatements to publicly disclose key features of their programs including:
States and localities are just starting to issue GASB 77 disclosures for the first time, and New York City was the first to do so in November.
The Pew report recommends a series of best practices to guide states toward more effective tax incentive programs.
Pew said states initially need to make plans that evaluate all major tax incentive programs. Such evaluations should be objective, nonpartisan and conducted on a regular basis. States must also measure the impact of the incentives against the program objectives.
Finally, lawmakers and policy professionals must use data developed through the evaluation process to achieve program improvements. Pew said policy improvements are more likely when states have formal processes and lawmakers use the information to guide their actions.
“Evaluating incentives well takes time, effort, and persistence,” the report concludes. “The payoff, though, is worth it: Policymakers have the information they need to ensure that economic development tax incentives achieve strong results for states’ budgets, businesses, and workers.”
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Text of the report is at http://src.bna.com/ouP.
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