The Platform for Collaboration on Tax (PCT) has released a set of draft principles to guide the use of tax incentives. The PCT is a joint initiative of the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD), the United Nations (UN), and the World Bank Group (WBG). Its mission is “to support countries’ efforts to improve revenue mobilization.”

The purpose of the tax incentives document is “to help policymakers identify and secure any potential social gains from tax incentives while avoiding their pitfalls.” We agree with many of the proposed principles this draft provides. While it is intended for national-level policy leaders around the world, much of the guidance is relevant to state and local tax incentives in the US. 

Here we provide a brief overview of the main principles. We encourage you to look at the sub-principles and accompanying remarks for more detail. 

1. Justification. Incentives may be warranted only if net social benefits can reasonably be expected, for reasons that are publicly articulated. 

2. Design. Incentives should be designed to promote the favored activity while avoiding unnecessary distortions to other activities and limiting the revenue cost.

3. International Considerations. Incentive design should be sensitive to international commitments and circumstances, and with an openness to mutually beneficial cooperation.

4. Legislation. Incentive legislation should be clear, integrated into tax law and subject to effective oversight.

5. Implementation. Tax incentives should be implemented so as to promote voluntary compliance, mitigate revenue and governance risks, and provide the data needed to evaluate them. 

6. Assessment. All tax incentives should be subject to periodic, public and evidence-based assessment. 

Many of the themes throughout the document are consistent with smart incentive practices. We applaud the principles’ guidance on tying incentive use to clear policy objectives, targeting incentives appropriately, putting in place rules for compliance and monitoring incentive use, enabling data sharing across agencies, and conducting good quality evaluations that consider both costs and benefits. 

Smart Incentives has provided feedback to the PCT, as requested in the draft principles. Our main suggestion is to be more assertive in requesting resources to enable many of the principles to be put into practices.  Specifically:

In our experience, investments in dedicated staff time and information systems are needed if agencies are to collect quality assessment data, manage it, and report on it to stakeholders. Agencies need resources to allow them to obtain, analyze and share tax incentive data in a timely manner.

Similarly, good evaluations take time and resources to complete, especially if striving to create a counterfactual.  Without a more aggressive call for resources, the principles may remain aspirational when they are quite reachable even with relatively small amounts of additional resources.