NCPA - National Center for Policy Analysis

Evaluating State Tax Incentives for Jobs and Growth

April 19, 2012

In their quest to strengthen their economies, particularly in the wake of the Great Recession, states continue to rely heavily on tax incentives, including credits, exemptions and deductions, to encourage businesses to locate, hire, expand and invest within their borders.  Yet half the states have not taken basic steps to produce and connect policy makers with good evidence of whether these tools deliver a strong return on taxpayer dollars.  This failure evinces the need for more thorough evaluation of the impacts of tax incentives and whether they produce a net benefit or loss for the states in which they are implemented.

To this end, researchers at the Pew Center on the States have established four judging criteria whereby states can assess the thoroughness of their evaluations:

  • Inform policy choices -- build evaluation of incentives into policy and budget deliberations to ensure lawmakers use the results.
  • Include all major tax incentives -- establish a strategic and ongoing schedule to review all tax incentives for economic development.
  • Measure economic impact -- ask and answer the right questions using good data and analysis.
  • Draw clear conclusions -- determine whether tax incentives are achieving the state's goals.

If states can follow this rubric for assessing their own tax incentives, which incorporates necessary components of both the quality and scope of assessment, they will likely find that several incentives should be struck from their books while others should be expanded.

The Pew Center followed up on this rubric establishment by grading states based on their use of such steps.

  • Thirteen states were found to be "leading the way," which means that they are meeting both criteria for scope of evaluation and/or both criteria for quality of evaluation.
  • Twelve states achieved "mixed results," meaning that they had some success in both quality and scope but had not achieved excellence in either category.
  • The other 25 states and Washington, D.C., were found to be "falling behind," suggesting that their internal analysis was subpar in both quality and scope.

Source: Brandon Brockmyer et al., "Evaluating State Tax Incentives for Jobs and Growth," Pew Center on the States, April 2012.

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