Pennsylvania Revises Tax Credits After First State Evaluations

Detailed incentive analyses include recommendations for future reforms as well

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Pennsylvania Revises Tax Credits After First State Evaluations

Pennsylvania Governor Tom Wolf (D) signed a measure June 28 that makes numerous reforms to state tax incentives. Among its provisions, H.B. 262 closes the New Jobs Tax Credit to new applicants after June 2020 in the first significant policy change aligned with specific program evaluations produced by the state’s Independent Fiscal Office (IFO). The new law also makes administrative changes to the state’s Historic Preservation Tax Credit that reflect suggestions in that credit’s IFO report.

The evaluations, released in January, include valuable recommendations for lawmakers on how to improve program design and administration. The three analyses—for the New Jobs, Historic Preservation, and Film Production credits—are the first produced by IFO as part of the General Assembly’s 2017 mandate to regularly review such incentive programs. This year’s legislative action shows that policymakers can make effective use of these reports, more of which are planned.

With the publication of these studies, Pennsylvania joined an increasing number of states producing evaluations that look at whether tax credits are producing the desired results—and that offer recommendations on how they might be strengthened.

In this initial set, the IFO provided policymakers with helpful insights and questions to guide discussions of these programs. The analyses suggest that policymakers think critically about the intent of each credit and include options for changes to improve performance. The examination of the Film Production Tax Credit, for example, encourages the state to develop a long-term vision for the program and consider whether the goal is to maintain or expand the existing industry. If the latter, policymakers crafting future legislation would need to consider whether Pennsylvania is willing to significantly increase its investment.

Once the intended outcomes for a program are clear, lawmakers should ensure that policies are designed to meet those goals.  More precise targeting of the Film Production Tax Credit, for example, might prompt them to focus on long-term activities by establishing separate credits for television productions or for encouraging local hiring by increasing credit rates for resident labor. Similarly, for the Historic Preservation Credit, evaluators recommend replacing the current lottery system for picking among eligible applicants with a scoring system that would help the state better target limited resources to achieve desired outcomes.

The IFO also recommends making each of these transferable credits refundable to improve their economic impact. That way more of the credit per dollar allocated incentivizes activities that the state wants to encourage, rather than losing value when a credit is sold.

States often have reasons to make credits refundable, such as for temporary projects or—as noted by the IFO—instances in which companies may not have enough state tax liability to make full use of the credit. But policymakers also need to keep in mind the broader fiscal implications of refundability, such as the potential for runaway program costs. To its credit, Pennsylvania includes caps on these programs, which balance the benefits of refundability while controlling for potential revenue implications.

The IFO also suggests administrative changes to the programs, some of which lawmakers have already begun implementing. The evaluations recommend clarifying and refining application and review processes to increase predictability, transparency, and flexibility. Specifically, the evaluations call for regular award dates for historic preservation credits, a quicker approval process for film credits, and the flexibility to switch between higher- and lower-value credits for the new jobs program, depending on whether a company hires veterans or previously unemployed individuals. With greater certainty about the timing and their eligibility for potential benefits, companies can determine whether applying for the credits is worth the effort.

Finally, the IFO proposes additional metrics for agencies to track the performance of each program. This would include data that could help answer the “but for” question, such as information about film credit applicants that did not receive an award, to see if they still operated in the state without the incentive. Other metrics vary by credit and are designed to determine if program goals are being met. If the additional data are available for future evaluations, the IFO should be able to improve the depth of its analyses and more accurately assess how well these programs are achieving their goals.

With the publication of these reports, Pennsylvania has become a leader in tax incentive evaluation. The state plans to examine 19 more credits over the next four years, spanning a wide array of programs. This work marks the start of a broad and comprehensive effort to ensure that the state’s credits are worth the cost.

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