Colorado, other states fail to check tax breaks, Pew says
Throughout the country, states continue to use tax incentives to encourage businesses to relocate and invest within their borders. No one really knows exactly how much policymakers spend annually on tax incentives for economic development.
A recent report by the Pew Center on the States argues that every state has at least one tax incentive program – running to billions of dollars in incentives nationwide. To determine whether policymakers are getting the information to understand whether incentives are delivering a strong return, Pew reviewed nearly 600 documents from state agencies and legislative committees and interviewed more than 175 policymakers, agency officials and experts.
According to the report, none of the states has mechanisms in place to test whether these investments are working. In addition, lawmakers do not have access to data when deciding whether to use incentives, how much to spend and who should get them. However, the report shows that some states are beginning to assess tax incentives. Oregon, for example, gives its incentives expiration dates, forcing lawmakers to periodically review them. Arizona, Iowa and Washington are attempting to incorporate evaluation procedures in their policymaking process.
According to the Pew report, Colorado is one of the states lagging behind, with no criteria for scope or quality of evaluation. Colorado does not review its tax incentives or provide lawmakers with data to help with policy choices. In addition, there is no evaluation of any of its programs to document the effect on jobs growth.
The Pew report argues that there is good news because a number of approaches exist for lawmakers to assess effects of tax incentives. These include:
- Cause and effect: To what extent did tax incentives change businesses' decisions, and how much did they reward that would have happened anyway?
- Winners and losers: To what extent did the incentive benefit some businesses or individuals at the expense of others?
- Unintended beneficiaries: How much of the benefit of the incentive flowed across state borders?
- Timing: When will the costs and benefits of the incentive occur, and how long will they last?
- Economics of budget trade-offs: What were the adverse economic impacts of the tax increases or spending cuts made to fund the incentive? Do the benefits of the incentive outweigh those impacts?
- Indirect impacts: To what extent do the investments of companies receiving incentives filter into the broader economy, causing further economic gains?
During these challenging economic times, most states are cutting funds for K-12 education, health care and other critical public services. Every dollar counts, and before states give away taxpayer dollars on incentives, policymakers should know whether these tools deliver a strong return on investment.
We at the Bell support regular and comprehensive evaluations of tax incentives to document their economic impact. Last year, we supported a bill that would have created a mechanism for gathering and presenting information on tax expenditures. SB 11-184 would have directed the Department of Revenue to produce an annual report describing various aspects of Colorado's tax expenditures, giving policymakers and the public data to assess the expenditures' value in accomplishing the public-policy objectives. This information would help identify tax expenditures that are working and are worthy of expansion as well as those that are not and should be restructured or repealed.
– George Awuor
Article posted on April 23, 2012