Changing Gears
1:59 pm
Thu April 12, 2012

Are tax incentives working? Many states don't even check

Tax incentives have become the weapon of choice among states battling for new business investments. Niala Boodhoo reported in December that offering incentives has become a sort of strategy game for Midwest states hoping to one-up each other as everyone fights to grow jobs. But, as Niala reported, these are games with millions of dollars in tax breaks and thousands of jobs on the line.

Now, the Pew Center on the States is taking a look at incentives from a different angle. The Pew Center tried to figure out whether anyone is actually checking to see whether the incentives are worth it.

Turns out, a lot of states do very little follow-up once they approve incentives programs.

From the Pew Center’s release on the study:

States that have conducted rigorous evaluations of some incentives virtually ignore others, or evaluate infrequently. Others regularly examine these investments, but not thoroughly enough.

Michigan and Wisconsin are both called out for heavily scrutinizing incentives for the film industry, while ignoring other incentive programs:

Massachusetts, Michigan, New Mexico and Wisconsin have studied their film tax credits in recent years but have not reviewed other types of incentives in the same detail.

Michigan made news when Governor Rick Snyder announced the state would get out of the incentives game, and focus instead on helping small startups. But Michigan still has some incentives programs. It’s just not evaluating them rigorously, according to the Pew Center.

Indiana and Illinois fare even worse in the study. Both are listed among the 26 states the Pew Center says are “Trailing Behind.” According to the study, both states “did not publish a document between 2007 and 2011that evaluated the effectiveness of a tax incentive.”

So, none of the tax incentive programs in Indiana and Illinois have been evaluated, according to the Pew Center.

The Associated Press says Illinois, in particular, has drastically increased its tax incentives. It made headlines last year by offering $330 million to keep Sears and two financial exchanges from leaving the state.

But Illinois officials defended their policies to the AP:

Marcelyn Love, a spokeswoman for Illinois’ Department of Commerce and Economic Opportunity, defended the agency’s evaluation process. She said companies applying for tax breaks through Illinois’ primary incentives program have to have an outside audit showing they created the promised jobs before they receive the credit. The program, called EDGE, is only for companies threatening to leave the state.

The Pew Center report focuses not on individual awards, but on incentives programs as a whole. The researchers looked for any sign that the states have stopped and evaluated their programs, and whether those evaluations actually had an effect on policy.

By those criteria, a few Midwest states did well in the report. Wisconsin, Minnesota, Iowa and Missouri were all listed as “Leading the Way” on tax incentive evaluations.

Iowa is listed as one of only four states in the country that have fully integrated those evaluations into the policy-making process. What that means is there’s actually something called the Iowa Legislative Tax Committee. The committee is relatively new, but its job is to review all of the state’s tax incentives every five years, and report those findings to state legislators so they can decide whether to change the programs.

According to the Pew Center:

“The more time legislators spend understanding how these things work, the better,” says state Sen. Joe Bolkcom (D), co-chair of the committee. “If we know how they work, we’ll make better decisions.”

Sounds like a worthy goal.