Getting an ROI on State Incentives

States do a poor job of evaluating billions in tax breaks.

State governments in the United States grant billions of dollars’ worth of tax incentives each year to encourage companies to build plants or create jobs, but a recent study suggests policy makers are failing to assess the effectiveness of those tax breaks.

The report released last week by the Pew Center on the States says just 13 states are doing a good job of evaluating their incentives. Twelve states are doing a “mixed” job, Pew says, while the remaining 25, along with the District of Columbia, meet none of the criteria set out in its study.

Pew sees shortcomings even among the states it views as leading-edge, though. “We found that no state ensures that its policy makers have the evidence they need to determine whether incentives are effective,” says Jeff Chapman, a senior researcher at Pew.

The Pew report says four states have taken steps to integrate their assessments of incentives with policy processes: Arizona, Iowa, Oregon and Washington. It notes that Oregon now sets most tax credits to expire after six years, giving leaders a chance to take a second look at them. Pew cites Arizona’s requirement that lawmakers review major tax incentives every five years and the comprehensive process for reviewing tax incentives Washington put in place that includes input from citizens, an analysis by the audit unit of the legislature, and legislative hearings.

“While no state has put all the pieces together, some states are making tremendous strides,” Chapman says.

States spend a lot of money on attracting business investment and encouraging job creation. A 2011 study by Good Jobs First, a Washington-based non-profit, looked at 238 programs in the 50 states and the District of Columbia and put their total cost to taxpayers at $11 billion, while noting that there was no information on the cost of 20 of the programs. And a 2011 book that's cited in the Good Jobs First report, Investment Incentives and the Global Competition for Capital, by Kenneth Thomas, a professor at the University of Missouri-St. Louis, estimates that the total bill for U.S. state and local government incentives comes to $70 billion a year.

Chapman notes that assessing how well tax breaks are working is particularly important given that so many state economies are suffering.

Philip Mattera, research director at Good Jobs First, says fiscal pressures have caused states to reconsider their incentives for businesses. “And a few states have abolished or cut back programs in recent years,” he says. “On the other hand, states feel like they have to go out and seek new investments and new jobs for the state. So when the economy is weak, sometimes states are prone to spend more money on these programs.”

Pew’s Chapman also notes the competition that drives business tax breaks. “Incentives are used in a bidding war between states over firms that are looking to relocate or expand,” he says. “By not using effective incentives, states could lose opportunities to create jobs and build their economies. But they need an evaluation system to see if scarce resources are being used effectively.”




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