More states want to conduct tax incentive evaluations, but many still lack the data needed to complete useful assessments. A recent gathering of economists, program evaluators, and fiscal analysts convened by the National Conference of State Legislatures and The Pew Charitable Trusts addressed this issue and reviewed steps individual states are taking to improve the data available to support incentive evaluations.
Tax incentives are not limited to traditional economic development activities. They cover a wide variety of preferential tax rates, credits, exemptions, or deductions serving many types of policy objectives, for which the total cost and ultimate effectiveness are frequently unknown.
Evaluations attempt to fill this knowledge gap. Analysts often start at a disadvantage because they need to pull together relevant information that is typically scattered in various forms across multiple government agencies – if it exists at all. Further, this data may not be evaluation-ready. It may exist (still!) only on paper forms or have been collected haphazardly over the years, making it difficult for evaluators to use the data in their analyses.
Data challenges can be addressed by:
Enabling data sharing
Data sharing “is a formal process by which state agencies that collect and manage administrative records, such as corporate income tax and unemployment insurance records, may grant other government agencies and outside researchers access to microdata within those records to support authorized activities.”
The key phrase here is “formal process.” Data sharing does not happen automatically. Legislative approval may be necessary, and procedures to share access to confidential data appropriately must be established. In other words, if sharing of tax or labor data across agencies will be part of a tax incentive evaluation, it is best to start early.
The website StateDataSharing.org provides specific guidance on the steps needed to make data sharing work for program evaluation and policy analysis.
Some of the data required to conduct an evaluation is not available from other sources and must be collected directly from tax incentive recipients. Shifting from paper to online forms is an important first step in making data more accessible for analysis.
Existing compliance reporting forms may also need to be modified to include a limited number of additional questions to support an evaluation. Careful thought should be given to the specific information that is being requested. Guidance should be given to reporting entities so that the forms yield consistent, relevant, useful, and unique data.
Our infographic on managing incentives for transparency and accountability includes steps for collecting and managing data; monitoring, assessing and evaluating performance; and reporting results.
Talking to program managers and recipients
Tax incentives may work differently in the real world than they would appear on paper. Evaluators have found it helpful to spend time learning about the types of projects or entities that have used different tax incentives. These conversations also generate valuable insights about tax incentive design and usage that can improve program effectiveness and lower compliance costs. Engaging with program managers and recipients can also build support for program evaluations and identify additional data sources.
For more information on this topic please see the NCSL State Tax Incentive Evaluation Database and Economic Development Tax Incentives from The Pew Charitable Trusts.