Economic Development Incentives Evaluation Toolkit

Resources to help state and local officials measure and increase effectiveness

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Economic Development Incentives Evaluation Toolkit

Tax incentives are one of the primary tools that states use to strengthen their economies. But these incentive programs also collectively cost states billions of dollars each year. For more than 10 years beginning in 2012, The Pew Charitable Trusts analyzed states’ policies and practices to provide insights into the costs and returns of these incentives. Over that span, the number of states that evaluate the effectiveness of their incentives increased dramatically, as did the amount of data, analysis, and technical capacity available to conduct evaluations.

This toolkit offers an array of resources—reports, webinars, technical assistance memos, testimonies to state legislatures, and presentations from a decade of research and analysis—to help policymakers, researchers, and the public better understand the impact of economic development incentives in their states.

Every state is different; so is every incentive program and evaluation process. However, Pew has found that many lessons and best practices are broadly applicable. The materials in the toolkit are categorized by the state or locality studied and by subject matter, with each resource addressing a specific element of incentive evaluation and improvement. Although some of the content may be dated, particularly in the older documents, that material nevertheless provides important context on the evolution of tax incentive evaluation efforts around the country.

In addition, Pew provided funding to the National Conference of State Legislatures to catalog state tax incentive evaluations dating back to 2008 in a publicly available State Tax Incentive Evaluations Database.

Please find a glossary of terms at the bottom of this page.

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Glossary

Economic development incentives. Financial investments that collectively are a primary tool states use to try to change business behavior, such as encouraging businesses to create jobs, relocate, invest in equipment and facilities, or engage in other economically beneficial actions.

  • Tax incentives. Credits, exemptions, and deductions.
  • Cash incentives. Direct payments in the form of grants or loans to businesses.
  • Discretionary incentives. Programs that grant administrators leeway to decide which applicants receive awards based on predetermined parameters and that require businesses to meet various performance standards.
  • By-right incentives. Codified programs in which any business that meets the requirements is eligible to receive an award.

But for. Business-generated economic activity that would not have occurred without a given incentive provided by the state.

Displacement. Economic activity spurred by a tax incentive that comes at the expense of other businesses in the state.

Economic modeling. Tools, typically based on a series of equations that represent economic relationships, that evaluators use to measure the economic impact of tax incentives, for instance, how the introduction of an incentive in one sector affects other areas of the economy. Examples include REMI (Regional Economic Models, Inc.) or IMPLAN (impact analysis for planning).

Fiscal challenges. Quick and unexpected increases in the cost of incentives that cause problems for state budgets.

Incentive administration. State agency or agencies responsible for operating tax incentive programs, which, depending on the specifics, may include advertising, eligibility determinations, or performance monitoring.

Incentive data. Information about tax incentive programs that states gather from a variety of sources including revenue departments, workforce agencies, and businesses themselves.

Incentive design. The features of a program, including which companies are eligible, the size of benefits, and the type of benefits (whether tax breaks, grants, or loans), which largely drive the returns states realize.

Leakage. Benefits of incentive-driven economic activity in a state that flow to other states, such as when a manufacturer locates in a state to take advantage of an incentive but buys supplies from a company in a neighboring state, boosting revenue and jobs there.

Multiplier effect. The additional economic activity that cascades from a change in business activity, such as when a company invests or expands, creating jobs, and those newly hired workers then spend their wages on goods and services, producing yet more jobs.

  • Multiplier. A measure of the magnitude of additional economic impacts generated by a change in business activity.

Opportunity costs. Lost benefits in certain spending areas, such as education, transportation, or broad-based tax cuts, resulting from dedicating funds to an incentive that the state might otherwise have invested in those priorities.

Regression analysis. Models that estimate the relationship between a single independent variable and one or more dependent variables.

Counterfactual statistical analysis. An attempt to estimate outcomes under a set of circumstances other than those observed in the real world, such as under a different set of policies, which is then compared to observed actual outcomes to gauge a program or policy’s causal impact.

Difference-in-differences analysis. A statistical technique used to study a new policy or program’s effect by comparing outcomes over time between a treatment group that experiences that policy or program and a control group that does not.

Interrupted time series analysis. A statistical technique that measures an incentive’s impact by looking at outcomes over a given period before and after its implementation.

Panel data analysis. A statistical method of assessing change in a set of businesses or individuals along the same characteristics, such as employment or revenue, over time.

Propensity score matching. A statistical technique that compares outcomes for each observed person or business that was subjected to a policy or intervention with those for a similar person or business that was not, using the latter like the control group in a controlled experiment.

Simulation analysis. A method that involves creating a model of how businesses or individuals respond to various economic factors and then using it to simulate outcomes under various incentive policies and draw conclusions or make predictions about a given policy’s impact.

Synthetic control method. A statistical technique that assigns weights to and combines multiple units, such as states or cities, that are not exposed to a policy change into a synthetic control group that, in combination, is comparable to the study unit that has been subjected to the change.

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