New York City Takes Steps to Regularly Evaluate Tax Incentives

Editor's note: The headline for this testimony was updated on Nov. 16, 2016, to reflect the correct location mentioned as New York City rather than New York state.

Josh Goodman, an officer with Pew's state fiscal health and economic growth project, submitted testimony to the New York City Council’s Committee on Finance on Sept. 22. The testimony expressed support for legislation that would create a process for regular evaluation of the city's economic development tax incentives. Full text of the testimony is below.

Good afternoon, madam chair and members of the committee. Thank you very much for this invitation. My name is Josh Goodman and I’m an officer with The Pew Charitable Trusts’ economic development tax incentives project. Pew is a public charity that provides research and technical assistance to governments at the local, state, and federal levels.

My project helps cities and states make evidence-based reforms to their economic development tax incentives. To do that, one of the most important steps is to set up a process for regular evaluation, precisely what this legislation would do.

Lawmakers across the country are looking for ways to create jobs, raise wages, and help the local economy thrive over the long-term. Tax incentives are one of the primary tools that states and cities use to try to achieve each of those goals. They also collectively cost governments many billions of dollars. Regular, rigorous evaluation is a proven way to ensure that tax incentive programs are serving the needs of your budget, economy, and taxpayers.

Evaluations have provided reliable information on the economic impact of incentives, including the extent to which they’re successfully influencing business behavior. These studies have also uncovered flaws in the design or administration of incentives and have recommended improvements.

This information makes a difference. In some cases, policymakers have used high-quality evaluations to make wholesale changes to incentive programs. For example, a series of evaluations found that California’s $750 million-a-year Enterprise Zone program was doing little to boost employment and instead was simply moving jobs from place to place within the state. In response, lawmakers replaced the program in 2013 with other incentives designed to address its flaws.

In other cases, evaluations have helped policymakers make subtle changes to incentives to improve their effectiveness. For example, a 2015 evaluation described a Maryland tax credit for rehabilitating historic buildings as a model program because of its strong fiscal protections. But the study also pointed out ways the tax credit could work better. For example, the evaluation noted flaws in the scoring system state officials used to determine which commercial projects would qualify for the incentives.  In response, lawmakers extended the program for another five years while also adjusting the scoring system.

Until recently, however, lawmakers across the country have often lacked this type of information. In many states, incentives have been evaluated inconsistently or superficially, if they have been studied at all. At the city level, reliable studies on incentives have, if anything, been even less common. As a result, lawmakers have had little choice but to make decisions on incentives on the basis of anecdotes or incomplete information.

Thankfully, this situation is starting to change. Since the start of 2012, more than 20 states have enacted laws either requiring evaluation of tax incentives or improving existing evaluation requirements. These laws generally create processes where professional staff study major tax incentives regularly and then report the findings to elected lawmakers. Many of the laws require incentives to be studied on a rotating multi-year cycle, with different groups of incentives reviewed each year. That way, both the evaluators and the legislators can study a subset of incentives in detail each year.

We are also seeing growing interest in evaluation in major cities. Most notably, the City Council in Washington, D.C. approved legislation in 2014 requiring professional staff in the city’s independent Office of the Chief Financial Officer’s to evaluate incentives on a regular cycle.

In almost every case, evaluation legislation has received strong bipartisan support. These bills have also brought together supporters and skeptics of incentives alike, who agree on the need for better information.

These laws are each different. Each jurisdiction has customized the evaluation process to its own needs and circumstances. But successful evaluation processes usually share some common traits. For example, it’s important to have an evaluation office that is capable of producing high-quality evaluations. The ideal office has a non-partisan perspective, a willingness to offer policy guidance, and experience studying the details of government programs or measuring economic and fiscal impact. It’s also important to have a clear role for elected lawmakers because the purpose of evaluating incentives is to help inform economic development policy.

The legislation before you today reflects national best practices by giving the City Council a central role in the process. The Council is responsible for identifying a list of economic development tax expenditures to be studied and for developing an evaluation schedule.  Then the Independent Budget Office, which possesses both independence and expertise, will provide you with high-quality evaluations. In this way, the process is designed to serve your needs. Once evaluations are published, you can hold hearings on the results, consider what actions are necessary, and work with state lawmakers to improve the effectiveness of incentive programs.

As a result, this legislation stands to make New York City a national leader in this area. New York City has an opportunity to be one of the first American cities to adopt a process for regular, rigorous evaluation of tax incentives. In doing so, you’ll be able to help ensure that incentives are providing the best possible results for the city’s economy, budget, and people.

I commend the Task Force on Economic Development Tax Expenditures and the Finance Division staff for their work to study how to design an evaluation process. I also commend the Council for giving this important topic the attention it deserves.

Thanks so much for your time and attention. I’m happy to answer any questions.