South Carolina gave up $433 million in taxes to companies moving or expanding here in fiscal year 2015 alone. But was it worth the money? A new study says no one is really sure.
The report, released May 3 by the Pew Charitable Trusts, found that South Carolina is one of 23 states “trailing” in evaluating the effectiveness of the tax breaks that it offers economic-development projects. The state does not have a well-designed plan for reviewing all economic-development incentives and gauging whether those benefits work, the study says.
More than half of U.S. states have processes to regularly evaluate their economic development tax incentives, according to the report. How States are Improving Tax Incentives for Jobs and Growth: A national assessment of evaluation practices examines the progress that the 50 states and the District of Columbia have made to produce high-quality information on the results of their tax incentives.
Tax incentives are a primary tool that states use to try to create jobs, attract new businesses and strengthen their economies. Incentives are also major budget commitments, collectively costing states tens of billions of dollars a year. Given this importance, policymakers across the country increasingly are demanding high-quality information on the results of tax incentives.
The 10 states that are doing a good job evaluating incentives have set policies that require regular review. Effective evaluations determine whether the money that states give up in tax breaks to entice businesses “successfully changed business behavior, as opposed to rewarding what companies would have done anyway,” according to the report.
The SC Department of Commerce oversees some of the state’s incentives. Companies must prove they have hired the employees and made the investments they promised before they can claim those incentives.
After claiming tax credits, the companies must report their employment numbers regularly to ensure they are maintaining the employment levels that they promised to win the incentives.
The push for states to evaluate the effectiveness of incentives is new.
In 2015 and 2016, 13 states passed laws requiring evaluations, according to Pew.
The report recommends that states take three steps to evaluate tax incentives effectively:
Make a plan. Lawmakers need to put processes in place to regularly evaluate the results of major tax incentives. Well-designed evaluation plans ensure that the state’s full portfolio of incentives is examined regularly, that non-partisan staff with relevant expertise are tasked with the analyses, and that the reviews take place on a strategic schedule.
Measure the impact.High-quality evaluations carefully assess the results of incentives for the state’s budget and economy. To do so, evaluators must estimate the extent to which incentives successfully changed business behavior, as opposed to rewarding what companies would have done anyway.
Inform policy choices. Lawmakers and executive branch officials should use the findings of evaluations to improve the effectiveness of tax incentives. Policy improvements are more likely when states have a formal process that ensures lawmakers will consider the results—for example, by holding legislative hearings on evaluations.
“More states are evaluating incentives with far more rigor than just a few years ago,” said Josh Goodman, of Pew’s economic development tax incentive project. “State officials are using evaluations to identify incentives that are working well and reform those that are not, and as a result, states are saving millions of dollars while achieving stronger economic results.”