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States are spending untold billions on special tax breaks that are supposed to steer business to behave in ways that lead to economic growth. We’re generally skeptical of these types of so-called incentives, and have long argued that they receive far too little scrutiny. A new report from the Pew Center on the States thoroughly documents just how little most states are doing to figure out if ordinary taxpayers are getting their money’s worth from these deals.
Pew’s Evidence Counts reveals that 25 states and the District of Columbia have done nothing even remotely rigorous in the last five years to determine if even a single one of their business tax incentives is working. Moreover, while Pew identifies 13 states “leading the way” in evaluating their tax breaks, they also note that “no state regularly and rigorously tests whether [tax incentives] are working and ensures lawmakers consider this information when deciding whether to use them, how much to spend, and who should get them.”
After looking at evaluation practices in all 50 states, Pew identified some of the same smart states that CTJ and the Institute on Taxation and Economic Policy (ITEP) have been urging others to emulate. Washington State, for example, is highlighted for undertaking comprehensive and transparent evaluations of all its tax breaks, while Oregon is credited for using sunset provisions to force lawmakers to regularly reconsider tax incentives that might otherwise continue for years without a second thought.
The Pew report urges lawmakers and analysts to ask the right questions when evaluating their incentives. Did the incentive simply reward behavior that would have occurred anyway? Were in-state businesses put at a competitive disadvantage by not receiving the tax break? Did a significant portion of the incentive’s benefit flow outside the state? Could the money have been put to a more productive use elsewhere in the budget?
As Pew explains, “states have to ask the right questions to get the right answers.” But so far, most states don’t bother to ask.
For more on Pew’s findings, and to see how your state stacks up, be sure to read Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth.