Rhode Island Requires Tax Incentive Evaluations

Earlier this month, Rhode Island adopted a law requiring that economic development tax incentives undergo regular and rigorous evaluations. The legislation (S 734) passed the General Assembly with only one dissenting vote and was signed by Governor Lincoln Chafee.

Because of this legislation, Rhode Island is on track to become a leader among the states on the evaluation of economic development tax incentives—those tax credits, deductions, and exemptions meant to increase jobs and businesses. Rhode Island is now one of only a handful of states to establish an ongoing schedule for such evaluations and ensure that evidence from these reviews informs lawmakers’ decisions on whether and how to use tax incentives.

Among the notable features of Rhode Island’s law are:

• The scope of evaluation: Regular reviews—every three years for existing programs—are required for 17 tax incentive programs that together are projected to cost the state more than $45 million in fiscal year 2013. Incentives created in the future must also be evaluated.
• The quality of evaluation: Evaluators must measure the benefits and costs of each incentive including its impact on the state’s budget and economy. The analysis must consider whether the economic benefits stayed in the state or flowed elsewhere, a key part of determining any incentive’s success. Each report must also draw clear conclusions about the incentive’s effectiveness—whether it meets the goals lawmakers set for the program and how it might be improved.
• The link to budget decisions: Following each incentive’s review, the governor’s budget proposal must make a recommendation to continue, reform, or end the program, encouraging policymakers to consider the evaluation findings. Budget hearings in the Legislature will provide opportunities to discuss and compare the results and costs of tax incentives alongside other types of state spending.

The Pew Charitable Trusts advised sponsors of the Rhode Island legislation, helping them apply and build on lessons identified in “Evidence Counts,” Pew’s national study of incentive evaluation practices. The report, released in April 2012, found that Rhode Island was among the 25 states “trailing behind” because it had not taken basic steps needed to know whether its incentive programs are effective.

Our State Work

Pew’s experts are working with state lawmakers, agency staff and economic development officials to advance policies that make tax incentive programs effective, accountable and fiscally sound. Learn more.