North Dakota Tax Incentive Reviews Yield Informed Policy Decisions

Other states should tailor evaluation processes to meet their specific needs

North Dakota Tax Incentive Reviews Yield Informed Policy Decisions

As more states establish processes to regularly and rigorously evaluate their tax incentive programs, they face important choices, such as who should perform the reviews and how conclusions should be tied to future policy decisions. Each state must determine what makes the most sense for its specific circumstances; there is no one-size-fits-all approach.

In 2015, for example, North Dakota established an effective state-specific process in which legislators play a central role. Their direct involvement in conducting incentive studies has two benefits. When evaluations identify possible program reforms or gaps, lawmakers can enact measures intended to benefit the state and its economy. And, just as important, they can take steps to strengthen the review process when they find shortcomings.

A process designed for a specific legislative structure

North Dakota’s legislature meets biennially, which means there are about 20 months between sessions. During that interim period, lawmakers serve on committees to study policy issues in-depth. Legislative Management—made up of representatives from both chambers—tasks a committee during each interim with reviewing specific economic development incentives. That was the Political Subdivision Taxation Committee in 2015-16 and the Taxation Committee in 2017-18.

The evaluation law provides guidance to the committees, highlighting topics they should consider, such as whether an incentive has met its goals and to what extent it rewards behavior that would have occurred even without the incentive. To help kick off these discussions, professional, nonpartisan staff members present background information on each incentive up for evaluation. Then, lawmakers publicly discuss the programs during a series of hearings.

The committees met 12 times during the 2015-16 interim period and eight in 2017-18. The flexibility to meet repeatedly over a long duration allows legislators to become familiar with program nuances. Additionally, the process allows them to develop an iterative approach to the evaluations, as well as to crafting recommendations and drafting legislation.

Legislators work to improve evaluation quality

When North Dakota legislators experience challenges evaluating the impact of an incentive, they try to identify ways to strengthen future program reviews. For example, lawmakers struggled in 2015-16 to analyze the fiscal and economic impact of the Angel Fund Investment Credit, one of the state’s largest tax incentive programs, because the state did not have access to dynamic fiscal impact software.

As a result, the Political Subdivision Taxation Committee recommended a measure, passed by the Legislative Assembly in 2017, that would allow the state-owned Bank of North Dakota to acquire the software. Senator Tim Mathern (D), a proponent of this legislation, noted that the state clearly needed better tools to fully evaluate the effectiveness of incentives. The bank subsequently purchased the software and produced supplemental evaluations examining the fiscal and economic impact of four credits, strengthening an already robust review process.

Evaluations inform policy decisions

Legislators have used the evaluation process to refine the state’s portfolio of tax incentives, with the intent of benefiting the state and its economy. For instance, the Political Subdivision Taxation Committee identified a significant flaw in the Angel Fund Investment Credit that had allowed credits to be awarded to companies outside of North Dakota for years. From 2011 to 2015, 55 of 116 companies claiming the credit were located out of state. In response, lawmakers enacted legislation in 2017 that included reforms intended to increase the in-state impact by more directly targeting North Dakota businesses.

In response to other conclusions in the committee’s final report, legislators repealed three incentives identified as being infrequently used: the microbusiness income tax credit, the wage and salary credit, and the certified nonprofit development corporation investment tax credit.

During the 2017-18 interim, the Taxation Committee determined that the state needed a new credit to support its manufacturing sector. Over a series of meetings, committee members heard that companies were struggling to find qualified workers in North Dakota, which led them to export business activity to other states. As a result, the Assembly enacted legislation in 2019 that created a new manufacturing incentive aligned with committee recommendations that is intended to better serve manufacturer needs.

In addition to fulfilling a specific state-identified economic development need, this new incentive follows best practices in accountability, design, and fiscal responsibility: qualified business activity must be new; businesses must provide data to facilitate evaluation of the credit’s effectiveness; aggregate annual awards cannot exceed $1 million; and the Tax Department may recoup awarded credits if a claimant fails to meet required productivity or job quality thresholds. Finally, the program includes an automatic expiration date, or “sunset,” ensuring that policymakers will debate the program before its scheduled end.

The thoughtful design of North Dakota’s evaluation process and the legislature’s commitment to using findings from these analyses continue to yield results. This structure may not be an option in all states, but it demonstrates the importance of defining a tailored approach to evaluations—and that there is no single “right way” to design such a process.

Josh Goodman is a senior officer, Alison Wakefield is an associate manager, and Khara Boender is a senior associate with The Pew Charitable Trusts’ state fiscal health initiative.

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Improving Tax Incentives for Jobs and Growth

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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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State Tax Incentive Evaluation Ratings

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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.