Minnesota

Tax Incentive Evaluation Ratings

Tax Incentive Evaluation Ratings: Minnesota

Rating: Leading

Key points:

  • Minnesota is leading other states because it has a well-designed plan to regularly evaluate tax incentives, experience in producing quality evaluations that rigorously measure economic impact, and a process for informing policy choices.
  • The state’s criteria for the studies reflect best practices for tax incentive evaluation.
  • Since Minnesota’s law does not require that each incentive be evaluated on a specific cycle, it will be up to lawmakers to ensure that they receive regular information on all major programs.

Minnesota evaluation law

Year enacted: 2015.a

Who evaluates: Office of the Legislative Auditor.

Length of review cycle: None specified.

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The Minnesota Office of the Legislative Auditor (OLA) has a long history of producing detailed studies of government programs that offer thoughtful recommendations for improvements. Under a 2015 law, the OLA is now producing similarly in-depth studies of economic development incentives.b

OLA’s first study was an examination of Minnesota’s Research Tax Credit, which the office completed in early 2017. The office analyzed data on the economic impact of the credit, surveyed taxpayers who benefit from it, interviewed relevant business associations, and compared Minnesota’s program to a sample of other states’ research and development credits. Through this work, the OLA reported on both the effectiveness of the credit and how well the state is overseeing it.c

The research credit study followed a plan for incentive evaluations that was adopted by the Legislative Audit Commission, the panel of legislators that oversees the OLA, in January 2016. This plan helps ensure that the OLA’s studies reflect best practices for incentive evaluation. For example, the evaluations estimate the degree to which incentives influence business decisions, a key step for rigorously measuring economic impact. They also describe whether protections are in place so that the incentives do not cause budget challenges.d That information should be valuable: Many states have faced budget problems after the costs of incentives increased quickly and unexpectedly.e

Minnesota’s law also includes a unique approach for providing information on “exclusive incentives” that lawmakers create for specific companies or projects. In recent years, lawmakers have committed hundreds of millions of dollars for exclusive incentives for major Minnesota employers such as the Mayo Clinic, the Mall of America, and the Minnesota Vikings.f Under the law, the OLA is required to produce a report on best practices for exclusive incentives, to help guide the Legislature’s decision-making on these kinds of deals in the future, rather than second-guessing decisions that have already been made.g

One weakness of Minnesota’s approach is the lack of a specific cycle for review. Many states, such as Connecticut, Florida, Indiana, Maryland, Mississippi, North Dakota, and Rhode Island, require that all tax incentives be evaluated every three to six years, but Minnesota’s law simply requires the Legislative Audit Commission to choose at least one incentive to be studied each year.h For that reason, it will be up to legislators on the commission to ensure that all major tax incentives are evaluated reasonably frequently.

Endnotes

  1. Minnesota Stat. Ann. § 3.9735, https://www.revisor.mn.gov/statutes/?id=3.9735.
  2. Ibid.
  3. Minnesota Office of the Legislative Auditor, “Minnesota Research Tax Credit: 2017 Evaluation Report” (February 2017), http://www.auditor.leg.state.mn.us/ped/pedrep/researchcredit.pdf.
  4. Minnesota Office of the Legislative Auditor, “Evaluation Plan for Evaluation of a General and Exclusive Incentive” (Jan. 14, 2016), https://www.leg.state.mn.us/docs/2016/mandated/160469.pdf.
  5. The Pew Charitable Trusts, “Reducing Budget Risks: Using Data and Design to Make State Tax Incentives More Predictable” (December 2015), http://www.pewtrusts.org/~/media/assets/2015/11/cost-predictability_artfinal.pdf.
  6. Steven Dornfeld, “New Tax Bill Laced With Special Tax Breaks for Selected Businesses,” MinnPost, May 28, 2013, https://www.minnpost.com/politics-policy/2013/05/new-tax-bill-laced-special-tax-breaks-selected-businesses; Briana Bierschbach, “How the Stadium Deal Was Done,” Capitol Report, May 25, 2012, http://politicsinminnesota.com/2012/05/how-the-stadium-deal-was-done.
  7. Minnesota Stat. Ann. § 3.9735.
  8. Ibid.
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Improving Tax Incentives for Jobs and Growth

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Tax incentives—including credits, exemptions, and deductions—are one of the primary tools that states use to try to create jobs, attract new businesses, and strengthen their economies. Incentives are also major budget commitments, collectively costing states billions of dollars a year. Given this importance, policymakers across the country increasingly are demanding high-quality information on the results of tax incentives.