using-roi-for-incentive-evaluations-easier-said-than-done

This post is part of an occasional series examining state and local incentive evaluation reports.

Last month the Louisiana Legislative Auditor issued, “Tax Incentive Reporting. Follow-up on Agency Compliance with Act 191 of the 2013 Regular Session.” This report actually examines whether state agencies are complying with tax incentive reporting requirements. Those requirements include providing information on whether the incentive met its intended purpose, if the state received a positive return on investment, and whether there were any unintended effects caused by the incentive.

From our perspective, an important finding was that, “Return on investment (ROI) was not consistently reported to the Legislature to provide critical data on costly incentives.” ROI was reported for many of the critical tax incentive programs, but it was calculated differently across agencies and programs. The report notes that there is no statutory guidance on how ROI should be calculated for reporting purposes. Without consistent definitions, program ROIs vary widely ($0.37 – $11.20), making it difficult for policymakers to use that measure to determine program effectiveness.

This finding is not surprising to us given our recent work on economic development performance metrics in which we found that in many states, “Jobs and investment metrics are often not clearly defined or consistently applied across programs, hindering evaluations.”

The Louisiana report describes the following ways ROI is calculated for the state’s tax incentive programs:

• Certified spending divided by fiscal year revenue loss – Certified spending means total qualified expenditures for programs such as the Motion Picture Investor Tax Credit
• Tax credits used as a state match for federal funds divided by the fiscal year revenue loss – Used for school readiness programs administered by the Department of Children and Family Services
• Direct investment in income-producing buildings – Direct investment here means eligible costs and expenses incurred during the rehabilitation of certain historic structures and is used by the Department of Culture, Recreation and Tourism
• State revenue generated as a result of the tax incentive program divided by the fiscal year revenue loss – State revenue generated can be based on direct payroll spending, purchases of goods and services, new capital investment, and indirect activity generated. This measure is used by two Louisiana Economic Development programs.
• Student scholarships issued as a result of the tax rebate – Used by the Department of Education for the Tuition Donation Rebate Program

There is general agreement with the report recommendation to “track and maintain the necessary statistics to accurately calculate the ROI in relation to the lost tax revenue to the state.” The Louisiana Department of Revenue also explained that it has hired an economist to assist with data compilation and ROI analysis and intends to work across agencies to development a consistent ROI procedure.

We applaud that effort. Consistent definitions, cross-agency cooperation, and data sharing are all necessary elements of successful incentives reporting and evaluation.