States “have made progress in gathering evidence on the results of their economic development tax incentives,” but challenges remain for policy leaders seeking to understand and improve economic development outcomes.

Ellen Harpel of Smart Incentives and Josh Goodman from The Pew Charitable Trusts discussed “Evaluating and Improving Tax Incentives” as part of the Lincoln Institute of Land Policy’s seminar on Economic Perspectives on State and Local Taxes.

Goodman presented Pew’s latest report on the subject, How States Are Improving Tax Incentives for Jobs and Growth. 27 states and the District of Columbia have “made progress” in evaluating their economic development tax incentives. Ten states are considered evaluation leaders: Florida, Indiana, Iowa, Maine, Maryland, Minnesota, Mississippi, Nebraska, Oklahoma, and Washington.

As the report notes, evaluation “takes time, effort, and persistence.” There is no question about that. My presentation covered challenges associated with evaluations from the economic development perspective. Program evaluation is an integral element of the overall incentives process, but it is not without difficulties:

  • Company- and market-specific factors outside the control of economic development organizations determine the outcomes of interest (such as number of jobs created).
  • Private sector projects don’t succeed at reaching all of their objectives 100% of the time, and neither do incentives in such projects. While there is some level of risk inherent in all business endeavors, there is less tolerance for risk in public sector efforts. It only takes one bad project to drive negative perceptions of economic development initiatives.
  • Evaluations are difficult to do well. Many economic development organizations struggle to obtain the resources and expertise required to conduct quality analyses.
  • Economic development organizations neither control nor have access to all of the company-specific data needed to assess compliance and program outcomes. Obtaining and managing data for multiple, multi-year incentive programs is a substantial undertaking.
  • Results from evaluations are often reduced to a few sentences or headlines that disregard important nuances in the analysis.

Given the complexity of the analysis, communicating findings from incentive evaluations to interested audiences is not easy. But it also – potentially – can provide significant value for economic development organizations. Good evaluations can improve understanding of the role incentives play in economic development and demonstrate how these programs help achieve community economic development goals.