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Pew Distills Best Practices in Evaluating Economic Development Tax Incentives

February 26, 2015

Although every state delivers tax incentives for economic development, there are numerous inconsistencies in how these incentives are evaluated. Based on best practices developed by 10 states and the District of Columbia that passed legislation requiring regular evaluation of economic development tax credits from 2012 to 2014, researchers at The Pew Charitable Trust developed a framework for states hoping to improve the accountability and performance of tax incentives in a new policy brief. Ultimately, the brief recommends three steps:

  • Making a plan that determines who will evaluate the incentives, how they will evaluate, and when they will evaluate. By identifying clear, measurable goals for each incentive, it is easier for policymakers to assess success;
  • Measure the impacts by selecting appropriate metrics and a reasonable timeframe for analysis. Although many evaluations study how incentives impact businesses, the authors suggest more emphasis should be on how incentives affect state residents (jobs, wages, economic security); and,
  • Inform decisions by identifying opportunities for improvement and encouraging lawmakers to regularly review incentives. According to the authors, this approach would allow for effective incentives to potentially become more effective, while ineffective incentives could be changed rather than completely eliminated.
tax credits