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What Is the True Impact of Tax Incentives?

States Sharpening Focus on Age-Old Query: What Is the True Impact of Tax Incentives?

By Jason Plotkin

Jason Plotkin is a state tax law editor at Bloomberg BNA, specializing in state tax credits and incentives.

Tax incentives are commonly used as a way to encourage businesses to locate to a state, hire employees and expand their operations. Tax credits for relocation and expansion, or for doing business in an enterprise zone, best illustrate this point. States reward businesses with these credits against their net income tax liability for creating new jobs within their state, or in the case of enterprise zone credits, within a designated area of the state. Traditional thinking is that businesses benefit by lowering their tax bill, and states benefit by creating jobs and spurring the economy.

When viewed in this light, tax incentives are, in essence, a means to fund economic development. The state is foregoing the collection of revenue it is entitled to collect in order to encourage businesses to grow. As such, “a dollar spent on a tax incentive is a dollar that you can’t spend on something else,” Josh Goodman, a research officer with the State Fiscal Health and Economic Group Project at the PEW Charitable Trusts, a nonprofit research and analysis organization focusing on public policy, told Bloomberg BNA Oct. 22.

Although there are several traditional ways for tax incentives to be evaluated, it was not until recently that states began creating a uniform and continuous process to do so. While some tax incentives contain statutorily required audits, many were left to be audited at the request of legislatures. These audits were limited in both scope and regularity, as not every incentive was required to be evaluated, and many evaluations were done on an ad hoc basis.

Continue reading at Bloomberg: States Sharpening Focus on Age-Old Query: What Is the True Impact of Tax Incentives?