Report: Few states effectively track tax breaks
CHAMPAIGN, Ill.—Most states are doing a poor job tracking whether their tax breaks for businesses are actually spurring job growth, including some that have poured hundreds of millions of dollars into corporate incentive programs even while grappling with record deficits, according to a new report.
The report released Thursday by the Pew Center on the States found that no state regularly takes a hard look at the effectiveness of all of its tax breaks. Twenty-five states and Washington, D.C., do little if any evaluation, including Illinois, which is among the states facing major budget struggles.
Only 13 were found to be doing enough, the study found.
It's difficult to say just how much U.S. states spend combined on tax incentives, but they've become more common in the past decade, particularly since 2008 when the country sank into recession. Unemployment rose and the money available for state budgets shrank, yet researchers found the tax breaks states handed out may not have produced the desired effect.
"Given that states are rebuilding their budgets and economies in the wake of the Great Recession, these are mistakes states can't afford to make," Pew senior researcher Jeff Chapman said.
Illinois, which is struggling with a multibillion-dollar budget deficit, has drastically increased its tax break commitments since the economy started to stall, offering $272.7 million in 2010, up from $63.7 million in 2006. It also has engaged in highly public -- and costly -- bids to retain major companies that have threatened to leave. It agreed last year to a package of $330 million in tax breaks for Sears Holding Corp. and two companies that operate Chicago financial exchanges, CME Group Inc. and CBOE Holdings Inc.
Marcelyn Love, a spokeswoman for Illinois' Department of Commerce and Economic Opportunity, defended the agency's evaluation process. She said companies applying for tax breaks through Illinois' primary incentives program have to have an outside audit showing they created the promised jobs before they receive the credit. The program, called EDGE, is only for companies threatening to leave the state.
Georgia, another of the 25 states that do little evaluation of their tax breaks, agreed this year to give Caterpillar about $75 million in incentives on a new plant the company plans to open.
Pew also found that the California provides no "high-quality evaluations" of a research and development tax credit that costs the state more than $1 billion a year, even as it wrestles with a budget deficit estimated to be more than $9 billion. California and Georgia officials didn't immediately respond to calls from The Associated Press seeking comment.
Missouri, one of the states Pew researchers found is among the stronger evaluators of tax incentives, offered nearly $80 million in tax breaks to 57 projects last year, a record high.
Among the glaring problems identified with incentive oversight was failing to provide information to state lawmakers who have to sign off on the programs, at least initially, Chapman said.
Therese McGuire, an economist at Northwestern University, said that with the right information lawmakers should be able to create focused incentives that at least increase the odds of a return on a state's investments, or to choose to provide nothing at all.
"I think it's possible from these examples for policymakers to make intelligent choices about whether or not to give tax incentives," McGuire said. "(And) you're talking to someone who has become sort of innately skeptical of tax incentives."
But University of Illinois economist Fred Giertz said that while the report is well-intentioned, it's often difficult to judge how well corporate tax breaks work.
"I'm not hopeful they'll have really precise results to measure job creation," he said.
Pew reviewed close to 600 documents for its report and interviewed more than 175 people, with every state participating, Chapman said.
Of the 13 states listed as doing an adequate job in oversight, four -- Oregon, Washington, Arizona and Iowa -- received the most praise in the report.
In 2009, Oregon lawmakers established a law ending most tax breaks after six years, giving lawmakers a chance to regularly reevaluate them. In Washington state, citizen input, analysis from the state's legislative auditor and annual legislative hearings are part of the process of regular evaluation. And in Arizona, a legislative committee is required to review all incentives every five years.
And Iowa's Legislature created a committee last year to review every incentive every five years, in part in response to a large number of tax breaks given to ethanol and biodiesel companies as those industries grew.
"We experienced a several-year period there where there was a lot of build up," Iowa Economic Development Authority spokeswoman Tina Hoffman said. "It just became apparent as you make those awards on the front end, you don't know what the full outlay is going to be (without some evaluation)."
But some states criticized in the report dispute Pew's findings.
Alabama Secretary of Commerce Greg Canfield said his state last year agreed to provide $91.48 million in tax breaks and other corporate incentives, including $20 million to a Chinese company planning to build a copper tubing plant.
Canfield said his agency can't afford to review the job-creation figures and wage targets called for in every tax-break deal it makes, it does review a number of them and cut the size of tax breaks it provides when warranted.
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