A growing number of states are recognizing the importance of evaluating their economic development tax incentives. For example, lawmakers in Indiana, Mississippi, and Rhode Island have recently enacted legislation to ensure their states take three key steps to regularly review and analyze these programs.
When states evaluate all of their tax incentives regularly, they are able to identify which incentives are effective and which are not and use this information to improve the programs’ results. States often review their incentives on a rotating basis over several years. Determining how frequently each incentive will be evaluated requires finding a balance between the need for up-to-date information and the time required to produce rigorous, detailed studies. Some states study incentives with similar goals in the same year to help facilitate comparisons between the programs.
How often all tax incentives will be evaluated
High-quality evaluations help states answer important questions. They study the extent to which the incentives encouraged businesses to create jobs and make investments that they otherwise would not have made. They measure how the state’s economy as a whole—not just the companies receiving incentives—has been affected. Ideally, an agency that reviews tax incentives has experience with program evaluation or economic analysis, access to relevant data, and a willingness to make impartial, nonpartisan policy recommendations.
The primary reason to evaluate tax incentives is to help policymakers make better-informed decisions. With this goal in mind, elected officials need to consider the results of evaluations and use them to improve economic development policy. Indiana, Mississippi, and Rhode Island will hold legislative hearings to help provide these opportunities.