By: Jackson Brainerd
As states slowly and steadily recover from the Great Recession, improving the business climate and spurring economic growth top priorities for many state legislators.
One popular economic development strategy is to offer tax incentives (e.g., property tax abatements, sales tax abatements, corporate income tax credits) to businesses, either to lure them away from other states, or to keep in-state businesses from developing a wandering eye. Every state has at least one tax incentive program.
Yet, despite their widespread use and popularity among lawmakers, states do not have a firm grasp on whether these public expenditures are worth the cost.
In 2012, the Pew Charitable Trusts reported that, “no state regularly and rigorously tests whether those investments are working and ensures lawmakers consider this information when deciding whether to use them, how much to spend, and who should get them.”
This year, some states are taking action to address the need for better evaluations of tax incentives. Georgia (SR 65) is looking to form a tax exemption study committee to look at the effectiveness of the state’s economic development tax credits. Nebraska (LB 538 and LB 539), North Dakota (SB 2057 and HB 1060), and Oklahoma (HB 2182 and SB 815) have all recently introduced bills that require regular evaluations of economic development tax incentives or would improve the current evaluation process.
The Pew Charitable Trusts has been assisting these three Midwestern states, and published another report on Jan. 21, which reported that between 2012 and 2014, 10 states and Washington D.C. passed laws that either require regular evaluations of incentives or improve current evaluation processes.
The Government Accounting Standards Board is also calling attention to the lack of evidence in the tax incentive conversation. At the end of January, it closed its comment period on proposed rules that would, for the first time, require state and local governments to divulge information about tax abatement agreements and report incentives as lost income in annual financial reports. This could be an important step in distinguishing the incentives that have been successful from those that have not.
All of this amounts to a promising trend.
Tax incentives can be expensive; the Journal of American Planning Association estimated that incentive programs cost state and local governments about $40-$50 billion a year. At a time when many states are strapped for revenue, they cannot afford to be throwing money at inefficient programs.
With more evidence at their disposal, lawmakers will be able to approach the incentive-making process with a better understanding of the cost of their state’s tax incentive programs to help them make sound decisions.
Jackson Brainerd is a research analyst in NCSL’s Fiscal Program. Email Jackson.