Pew: States Make Progress in Evaluating Tax Incentives

But many states still do not study incentives regularly

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Pew: States Make Progress in Evaluating Tax Incentives

WASHINGTON--More than half of U.S. states have processes to regularly evaluate their economic development tax incentives, according to a new report from The Pew Charitable Trusts. How States are Improving Tax Incentives for Jobs and Growth: A national assessment of evaluation practices examines the progress that the 50 states and the District of Columbia have made to produce high-quality information on the results of their tax incentives.

Tax incentives are a primary tool that states use to try to create jobs, attract new businesses, and strengthen their economies. Incentives are also major budget commitments, collectively costing states tens of billions of dollars a year. Given this importance, policymakers across the country increasingly are demanding high-quality information on the results of tax incentives. Building on earlier Pew research, How States are Improving Incentives for Jobs and Growth identifies best practices. The report recommends that states take three steps to evaluate tax incentives effectively:

  1. Make a plan. Lawmakers need to put processes in place to regularly evaluate the results of major tax incentives. Well-designed evaluation plans ensure that the state’s full portfolio of incentives is examined regularly, that non-partisan staff with relevant expertise are tasked with the analyses, and that the reviews take place on a strategic schedule.
  2. Measure the impact. High-quality evaluations carefully assess the results of incentives for the state’s budget and economy. To do so, evaluators must estimate the extent to which incentives successfully changed business behavior, as opposed to rewarding what companies would have done anyway.
  3. Inform policy choices. Lawmakers and executive branch officials should use the findings of evaluations to improve the effectiveness of tax incentives. Policy improvements are more likely when states have a formal process that ensures lawmakers will consider the results—for example, by holding legislative hearings on evaluations.

Based on these three criteria, Pew rated each state as “leading,” “making progress,” or “trailing.”

  • The 10 leading states—Florida, Indiana, Iowa, Maine, Maryland, Minnesota, Mississippi, Nebraska, Oklahoma, and Washington— have taken meaningful steps to achieve all three criteria. They have well-designed plans to regularly evaluate tax incentives, experience producing quality evaluations that rigorously measure economic impact, and a process for informing policy choices.
  • An additional 17 states plus the District of Columbia are making progress toward becoming leaders. Each state has made a plan by enacting a policy that requires regular evaluation of major tax incentives. However, they have yet to meet all three criteria.
  • The remaining 23 states are trailing. They either lack an evaluation policy or have had a policy in place for five years or longer that has not been effective in measuring impact or helping lawmakers improve programmatic effectiveness.

“More states are evaluating incentives with far more rigor than just a few years ago,” said Josh Goodman, of Pew’s economic development tax incentive project. “State officials are using evaluations to identify incentives that are working well and reform those that are not, and as a result, states are saving millions of dollars while achieving stronger economic results.”

Still, according to the new report, more than 20 states have yet to put a well-designed plan in place to regularly evaluate their tax incentives. Other states could improve the rigor of their analyses or take steps to ensure that lawmakers consider the findings. “With better information lawmakers can make better decisions,” says Pew’s Goodman, “and will be able to design economic development policies that serve the needs of the state’s budget, businesses, and workers.”

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The Pew Charitable Trusts is driven by the power of knowledge to solve today’s most challenging problems. Learn more at www.pewtrusts.org.

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Improving Tax Incentives for Jobs and Growth

A national assessment of evaluation practices

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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.

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