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Studies examine economic development incentives and how states evaluate their efficacy

by Laura Tomaka ~ July/August 2013~ Stateline Midwest »
In the never-ending quest to create jobs and business growth, states have long made tax and financial incentives a central part of their economic development strategies.
While exact figures are not known, states spend billions of dollars every year on these incentive programs.
A new CSG report examines trends in the type and number of incentive programs being used in each of the Midwest’s 11 states. For example, the region’s states commonly offer an array of tax exemptions — on everything from research and development and investments in new equipment, to new job creation and the accelerated depreciation of industrial equipment.
But how well do states evaluate the effectiveness of these various incentives? This question is addressed in a Pew Center on the States report.
Pew’s researchers found much inconsistency in how states evaluate their incentive programs. Some programs, they say, are evaluated rigorously, while others are given little or no oversight. In other cases, assessments are conducted, but not in a thorough or meaningful manner.
The bottom-line finding in “Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth” is that states are not doing a good enough job of evaluating the impact of these incentive programs and their returns on investment.
However, the Pew study does list 13 states as “leading the way” because of the scope and quality of their evaluation practices.
In the Midwest, Iowa, Kansas, Minnesota and Wisconsin are considered among the nation’s leaders based on four main criteria:
• All major tax incentives are evaluated.
• The incentives’ economic impact is measured.
• Conclusions about the efficacy of individual incentives are made.
• The findings are used to inform legislators’ policy choices.
For example, Iowa is lauded for making such evaluations a formal part of the policymaking process.
The joint Legislative Tax Expenditure Committee reviews tax incentives on a five-year cycle, and by law, must report on each program’s return on investment for the state. The Pew study notes, too, that the Iowa Department of Revenue’s high-quality assessments of these programs could “serve as a model for other states.”
The report also praises Wisconsin and Minnesota. In Wisconsin, lawmakers scaled back a film tax credit after it was shown to be ineffective. And in Minnesota, the state reworked an incentive program after the state auditor found that it cost as much as $30,800 per job created.

 

Article written by Laura Tomaka, staff liaison to the Midwestern Legislative Conference Economic Development Committee. The committee's co-chairs are Michigan Rep. Eileen Kowall and Nebraska Sen. Heath Mello.