Report: Few States Study Impact of Costly Tax Breaks

In 2008, Wisconsin became a good buddy to the film industry.

That’s when the state began offering film producers some of the most generous tax incentives in the nation — a 25 percent credit for money spent on production along with 15 percent cash back for spending on infrastructure. The state’s goal was simple: reel in major producers, along with their heavy wallets.

But when Hollywood arrived in Wisconsin, its money traveled elsewhere.

For instance, about two-thirds of the money spent by the makers of Public Enemies, a big-budget film starring Johnny Depp and Christian Bale, went out of state, according to a 2009 report from the Wisconsin Department of Commerce. Most of the movie’s workforce came from outside of Wisconsin, and the tax credit’s design had actually incentivized out-of-state hiring. In the end, the report found, Wisconsin had refunded companies $4.6 million of the $5 million they had spent in-state.

That review prompted a major overhaul to the tax credit, capping it at $500,000 and likely saving taxpayers money.

But Wisconsin’s film production tax credit is just one among many state programs that, combined, give billions of dollars to various entrepreneurs in hopes of spurring economic development, and few of the other programs have received the same in-depth study.

As states spend billions each year on tax incentives, the lack of scrutiny over each program’s impact is a serious problem, according to a report released Thursday by the Pew Center on the States, Stateline’s parent organization.

Each state has at least one incentive program, and most have many. But the Pew report, based upon review of close to 600 documents from state agencies and legislative bodies and more than 175 interviews, found that 25 states and the District of Columbia are “trailing behind” when it comes to reviewing the economic impact of tax incentives.

“[W]hen 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,” the report says.

As a result, taxpayers in some states may be unknowingly footing the bill for programs that are ineffective and, in some cases, abused.

Georgia, for instance, has done little study of more than 30 business tax credits which are expected to cost the state more than $100 million in 2012. In Massachusetts, the same can be said about more than $1 billion worth of tax credits.

“No one is determining whether it’s benefiting the intended recipients or the public.” Suzanne Bump, the Massachusetts state auditor, told authors of the Pew study. “It shows the real need for this kind of analysis.”

Though no state has a complete picture of the impact of its tax credits, the report notes, some states have ramped up scrutiny, providing models that other states might follow. Overall, the report names 13 states that are “leading the way,” while 12 states have “mixed results.” 

Under a new Oregon law, for instance, tax credits expire every six years and need legislative approval before renewal. Washington State reviews each tax credit every ten years, and Arizona and Iowa review major incentives every five years, though Iowa’s reviews, initiated after the state uncovered wide-scale abuse of its generous film tax credit, have not yet offered recommendations to policy makers. 

“It’s just a good idea to review them periodically and make sure they’re worth it,” J.D. Mesnard, an Arizona state representative who co-chairs the committee that reviews the state’s tax credits, told Pew researchers.