Smart Incentives recently participated in a session on A Better Way to Ensure Smart Tax Incentives during the National Conference of State Legislatures (NCSL) annual summit in Seattle. We were joined by Representative Steve Tharinger of Washington and Senator Brandt Hershman of Indiana to explore how states are 1) developing procedures to design “smart incentives” that meet targeted policy goals and 2) establishing processes to evaluate incentives after they have been implemented to ensure they are serving the purpose for which they were created. Here’s what we learned.

Washington Tax Preferences Review

In 2006 the Washington legislature decided that periodic reviews of tax preferences were important in determining if preferences continued to serve the public interest. The legislation (RCW 43.136) enacted a process for the review of tax preferences and assigned specific roles to two different entities: the Joint Legislative Audit and Review Committee (JLARC) and the Citizen Commission for Performance Measurement of Tax Preferences. JLARC conducts the reviews. The Citizen Commission created a ten-year schedule to complete reviews for the tax preferences, holds public hearings and provides comments on the JLARC reviews. The Citizen Commission may also rely on information supplied by the Department of Revenue instead of JLARC.

Since 2007 the JLARC has reviewed 204 preferences, all available through the Citizen Commission website. In 2015 JLARC reviewed 20 different tax preferences in 13 different reports and also produced an agricultural overview. JLARC’s approach reviews public policy objectives, beneficiaries, revenue and economic impacts, and whether other states have similar tax preferences. The review process has helped guide policy decisions during the incentive design phase.

Indiana Annual Tax Incentive Review

Indiana also has a process in place to evaluate incentives and first initiated a review of state tax credits and incentives starting in 2012 and continuing through the 2013 legislative terms. In 2014 the Indiana legislature established an annual review, analysis, and evaluation process for state and local tax incentives. The review is conducted by the Office of Fiscal and Management Analysis, Legislative Services Agency, under the direction of the Interim Study Committee on Fiscal Policy. The annual tax incentive review is to be conducted over a five-year cycle with each tax incentive being reviewed at least one time during that review cycle.

The Office of Fiscal and Management Analysis’ first annual report provides detail on the types of tax incentives reviewed, methodology, and recommendations about the continuation, modification, or termination of the reviewed incentives vis-à-vis original legislative intent and the cost and efficacy of the incentives.

Ensuring Smart Tax Incentives 

Some highlights from the session’s discussion were:

  • Tax incentives are often construed too broadly and are more appropriately analyzed as tax policy than tax credits/exemptions that seek to incentivize or induce behaviors or, more specifically, fulfill economic development, community development, and workforce development goals. Understanding intent and ensuring that policy objectives are well-matched to the chosen tax incentive is a challenging but necessary exercise for policy makers.
  • Although most agreed that tax preferences and incentive legislation should have clearly stated policy objectives, there was disagreement over whether the legislation should include the performance metrics used to assess and evaluate tax preferences’ impacts and effectiveness. Many favored the stance that the policy should offer broad guidance through clear policy objectives and allow implementing and evaluating entities to construct the metrics.

Smart Incentives applauds these states’ efforts and the high quality of the session’s discussion. As a recap of our own presentation, we recommend the following 3 steps state legislatures can take to create smart incentives:

  1. Set clear goals for each incentive program
  2. Request and fund regular program performance evaluation
  3. Work with the executive and economic development office to improve program performance and ensure incentives create economic opportunities in your state

 

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