Questions to Ask When Designing New Tax Incentives Josh Goodman jgoodman@pewtrusts.org The Pew Charitable Trusts 10/19/2017

Why to evaluate tax incentives Tax incentives are one of states’ primary economic development tools Tax incentives collectively cost states billions of dollars per year Evaluation is a proven way to improve the effectiveness of incentives Evaluations can lead to a more constructive conversation about incentives

Three steps to effective evaluation Step 1: Make a plan Step 2: Measure the impact Step 3: Inform policy choices

State tax incentive evaluation ratings

Evaluation example: Alabama

Group activity You’re presented with a proposal for a new tax incentive. The sponsor of the proposal says it will create high-quality jobs. What do you want to know before you decide whether to vote for it?

Three questions to answer before creating new tax incentives Does the incentive have a clear and measurable goal? Is the incentive designed to meet the goal? How will we know if we are making progress toward the goal?

#1: Does the incentive have a clear and measurable goal? Goals should… Be placed in the context of existing incentives Be placed in the context of the state’s economic development strategy Explain the logical link between the tax incentive and the desired economic outcomes

#2: Is the incentive designed to meet the goal #2: Is the incentive designed to meet the goal? Research suggests incentives are more effective when… Businesses create high-paying jobs Benefits are targeted to export industries Local unemployment is high Customized job training is included

#2: Is the incentive designed to meet the goal? Considerations include… Due diligence Performance standards Performance monitoring Fiscal protections

#3: How will we know if we are making progress toward the goal #3: How will we know if we are making progress toward the goal? Lawmakers can… Require that the incentive be examined regularly Ensure evaluators have data and other resources Establish legislative hearings on evaluations

“Sunrise” process options Detailed analysis of particularly significant proposals Committee policies for new tax incentives Performance statements or questionnaires

Detailed upfront analysis: Arkansas

Committee policies: Virginia

Committee policies: Virginia (cont.)

Questionnaire: Georgia

Questionnaire: Georgia (cont.)

Discussion questions What are your sources of information when considering new tax incentives? Do you have the information you need to make decisions? Do your committees have specific policies for considering tax incentives? What has worked well and what hasn’t? Are there particular characteristics of incentives that you’ve found leads them to succeed? Are there pitfalls that should be avoided?