Pew Study Finds Many States Lack Fundamental Oversight of Tax Incentives

April 20, 2012

The Pew Center on the States has a new report examining state economic development tax incentives. The study did not evaluate the efficacy of the incentives themselves, but rather critically examined each state’s evaluations of its own incentives. The study focused on the extent to which state tax incentive evaluations: (a) inform policy choices, (b) include all major tax incentives, (c) measure economic impact, and (d) draw clear conclusions. While some states are doing better than others, the report found that 26 states do not adequately meet any of the above criteria.

Measuring economic impact is one of the biggest problem areas that the Tax Foundation has identified for state tax incentive policy. The Pew study highlights many of the important factors that states must consider when evaluating the costs and benefits of their incentive programs:

  • States must determine the extent to which they are paying for activity that would have occurred anyway.
  • They must consider that some increases in economic activity in the subsidized area come at the expense of other areas.
  • They must recognize that some of the benefits will ultimately flow out of the state.
  • They must account for the economic impact of any tax increases or spending cuts that are required to offset reductions in revenue resulting from tax incentives.
  • States must be careful in how they interpret estimates of the indirect economic impact of subsidized industries.

While the authors see some improvement on the horizon, their assessment of the current state of incentive evaluations is not encouraging:

Every year, states invest billions of taxpayer dollars in tax incentives designed to promote economic development, but few know whether they are getting a strong return on their investment. Some states do not carefully measure the economic impact of their incentives; others do not examine them at all. Some have conducted rigorous evaluations of individual tax incentives and others have systems for regularly reviewing all major tax incentives- but no state has put the two together.

As a result, when lawmakers consider whether to offer or continue such incentives, how much to spend, and who should get them, they often are relying on incomplete, conflicting, or unreliable information.

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