Vermont

Tax incentive evaluation ratings

Tax Incentive Evaluation Ratings: Vermont

Rating: Trailing

Key points:

  • Vermont is trailing other states because it has not adopted a plan for regular evaluation of tax incentives.
  • The state has worked to clarify the goals of incentives, a key preliminary step for evaluating them.
  • Lawmakers have requested and received detailed information from legislative staff on options for implementing an evaluation process.

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Over the last several years, Vermont has taken a series of preliminary steps on the path to creating a process for regular evaluation of tax incentives. Now, policymakers are considering the best approach to put such a process in place.

In many states, including Vermont, policymakers have often created tax incentives without defining the programs’ goals. Without clear statements of purpose, it is hard for officials to later determine when incentives have succeeded. To address this issue, Vermont passed a law in 2013 requiring the staff of the Legislative Joint Fiscal Office (JFO) to draft goals for each of the state’s tax expenditures, including tax incentives and other types of tax credits, exemptions, and deductions.a The following year, lawmakers used the JFO’s report to adopt in statute goals for each tax expenditure.b

These purpose statements proved valuable when lawmakers set the JFO on its next task in 2015: to design a process for regular evaluation of tax expenditures.c The JFO determined that not every tax expenditure needs the same level of review.d Economic development tax incentives are designed to change business behavior, so analyzing them generally requires quantitative research to determine whether they are successful in doing so. In contrast, some other tax expenditures are designed to provide targeted assistance to people or activities—Vermont exempts some military pay from its income tax and purchases of medical products from its sales tax, for example—rather than changing behavior. Reviews of these types of tax expenditures typically focus more on reconsidering whether the goals of the programs are still relevant than on quantitative analysis.

With these distinctions in mind, the JFO proposed that some tax expenditures receive “full evaluations,” others receive “expedited reviews,” and ones that cost very little or are very unlikely to change be exempt from review.The JFO also laid out a potential evaluation schedule.f In 2016, lawmakers approved a bill requiring the JFO and the Department of Taxes to begin conducting expedited reviews.g However, a sticking point on the full evaluations remained: who would conduct the analysis. JFO’s report suggested three options—the state auditor, the Department of Taxes, or the JFO itself—but lawmakers requested additional information on the staffing and funding required.h

The JFO’s latest report, published in January 2017, offered a range of estimates for the funding required to establish an evaluation process. The estimates varied depending on how many tax expenditures would receive full evaluations each year.The next step is for Vermont lawmakers to consider the options and determine the best way to design an evaluation process that is consistent with the state’s own needs and resources.

Endnotes

  1. Vermont H.B. 295 (2013), http://legislature.vermont.gov/bill/status/2014/H.295.
  2. Vermont S.B. 221 (2014), http://legislature.vermont.gov/bill/status/2014/S.221.
  3. Vermont S.B. 41 (2015), http://legislature.vermont.gov/bill/status/2016/S.41.
  4. Vermont Legislative Joint Fiscal Office, “Tax Expenditure Review Report” (Jan. 15, 2016), 1–2, http://legislature.vermont.gov/assets/Legislative-Reports/Tax-Expenditure-Review-Report-01-15-2016-FINAL.pdf.
  5. Ibid.
  6. Ibid., 15–22.
  7. Vermont H.B. 873 (2016), http://legislature.vermont.gov/bill/status/2016/H.873.
  8. Ibid.; Vermont Legislative Joint Fiscal Office, “Tax Expenditure Review Report.”
  9. Stephen Klein and Sara Teachout, Vermont Legislative Joint Fiscal Office, to Senate committees on Appropriations and Finance and House committees on Appropriations and Ways and Means, memorandum, Jan. 14, 2017, 3, http://www.leg.state.vt.us/jfo/reports/2017%20Evaluation%20of%20Tax Expenditures.pdf.
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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.