Effective State Evaluation of Tax Incentives

August 11, 2014

I'm in Anchorage, Alaska, where on Saturday I presented on tax incentives to an audience of state legislators. Drawing on our research and reports by the Center for Regional Economic Competitiveness, the Pew Center on the States, and the Center on Budget & Policy Priorities, here’s what I said:

  • There are different definitions of incentives, ranging from inherent non-tax advantages to regulatory and legal environment to overall tax structure to focused tax incentives to special deals for certain companies. Structural components of the tax system to eliminate double taxation should not be considered the same as targeted tax credits.
  • Tax policy is powerful but can be overpowered by broader trends like demographics, fragmentation of production, faster life cycles, and globalization.
  • Most states offer tax incentives of some kind, although some states (e.g., Michigan, North Carolina, Rhode Island) are moving to fix their overall tax system rather than continue reliance on them.
  • Judging the effectiveness of incentives is difficult, as incentives are often judged by output (ribbon-cuttings and announcements) rather than data-driven outcomes; evaluations also usually ignore opportunity costs and diminishing returns.
  • Tax expenditure reports are flawed and most miss key details.

I wrapped with some key questions legislators should ask when evaluating tax incentives:

  • What is the problem we are trying to solve?
  • What will we create with this incentive?
  • Does this incentive create a competitive advantage?
  • How will we measure the impact?
  • Who is in charge of collecting data and reporting it?
  • How does this incentive fit into the larger mix?
  • If we had to appropriate budget dollars for this incentive package, would we spend it?
  • How much is too much?

Check out the full presentation embedded below.

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