Analysis

3 Ways Governors Can Strengthen States’ Long-Term Fiscal and Economic Health

At the National Governors Association’s Summer Meeting this week in West Virginia, leaders from around the country will collaborate across party lines to develop best practices that improve state government. Important lessons can be learned from governors who enacted policies this year to strengthen their states’ long-term fiscal and economic health. These initiatives reflect a growing demand for state policy decisions to be rooted in the best available data and evidence.

Here are three steps governors and state legislators have taken this year to shore up their states’ long-term fiscal health:

1. Tax incentive evaluation

Each year, states collectively spend billions of dollars on economic development incentives. But Pew’s research reveals that lawmakers often approve or continue incentives without knowing their potential cost or whether they are working. To fill this knowledge gap, six states enacted laws that require regular evaluation of economic development tax incentives. The bills received strong bipartisan support in every state. In Oklahoma, for example, Governor Mary Fallin (R) enacted a comprehensive bill that requires regular evaluation of all incentive programs, measures economic results, and ensures that evaluators consider the long-term fiscal impact of incentives. Minnesota, Nebraska, North Dakota, Tennessee, and Texas were the other five states to enact laws requiring regular evaluation of tax incentives.

More information is available at pewtrusts.org/taxincentives.

2. Rainy day fund reform

Over the past several decades, rainy day funds have helped states manage ups and downs in revenue, but some are more effective than others. Three states—Connecticut, Nebraska, and Utah—enacted bipartisan policies that are consistent with best practices identified by Pew to build savings during times of growth and smooth revenue volatility. In Connecticut, Governor Dannel Malloy (D) enacted comprehensive rainy day fund reform designed to help the state better manage its volatile revenue and expand its options for dealing with future budget pressures arising from economic downturns. The law establishes conditions for when and how the fund can be tapped, and it creates an automatic mechanism to deposit above-average revenue into the fund, among other changes. By harnessing revenue volatility, states can lessen the need for difficult budget choices during future downturns.

More information is available at pewtrusts.org/fiscal-health.

3. Evidence-based policymaking

In today’s fiscal environment, governors and state legislators face tough budget and policy choices that affect the outcomes they can deliver for constituents. By using rigorous evidence to inform these decisions, policymakers can achieve substantially better results by funding and operating programs that are proved to work. In Minnesota, for example, Governor Mark Dayton (D) signed into law bipartisan legislation to help state policymakers study the effectiveness of corrections and human services programs and identify those with the greatest return on public investment. The legislation directs Minnesota Management and Budget to implement the Pew-MacArthur Results First Initiative’s innovative benefit-cost model in order to increase government performance while controlling costs. Eighteen have partnered with Results First to leverage this customized approach and reduce wasteful spending, expand innovative programs, and strengthen accountability.

More information is available at pewtrusts.org/ResultsFirst.

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