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Evaluating Tax Incentives: Choosing Goals and Measuring Results
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Moderator: Mandy Rafool, Program Principal, National Conference of State Legislators
Sept. 9, 2013
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Evaluating Tax Incentives: Choosing Goals and Measuring Results
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Today's Speakers
Julie Srey Associate, Economic Development Tax Incentives Project Pew Charitable Trusts
Robert Zahradnik Director, State Policy, State Fiscal Health and Economic Growth
Pew Charitable Trusts
David Kirchner Senior Program Evaluator, Minnesota Office of the Legislative Auditor
Brent Lane Director, Carolina Center for Competitive Economies
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Julie Srey Julie Srey is an associate with Pew's economic development tax incentives project, which helps states advance policies that make their incentives effective, accountable, and fiscally sound. In her current position, Srey works with state officials, including technical assistance to develop and adopt policy solutions. She also conducts research for 50 state studies that highlight proven approaches to tax incentive evaluation that other states can learn from. Srey came to Pew in 2012 after working as an analyst for Greenberg Quinlan Rosner Research, where she conducted public opinion research for numerous campaigns, issue organizations and corporations. She also worked as a legislative assistant for U.S. Senator Kay R. Hagan, where she advised on judiciary, labor and employment policies. Previously, Srey worked as a policy and research analyst for numerous federal political candidates. Srey holds a bachelor of arts in political science and psychology from Tulane University.
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Robert Zahradnik Robert Zahradnik is policy director for Pew's work on state fiscal health and economic growth. He supervises initiatives that help states improve the return on investment from economic development tax incentives and better manage revenue projections and volatility. Zahradnik oversees research on tax incentive evaluation and long-term budgeting practices and directs technical assistance provided to state leaders including data analysis, policy development, and outreach to key stakeholders and the public. He is a frequent speaker on these issues and has presented to state legislators and a wide range of professional and academic associations. Before joining Pew in 2010, Zahradnik worked for the chief financial officer of the District of Columbia as a manager in the Office of Budget and Planning and then as director of research in the Office of Revenue Analysis. He was also a senior policy analyst with the Center on Budget and Policy Priorities in Washington, D.C. Zahradnik holds a bachelor of arts degree in communications from Penn State University and a master's of public administration from George Washington University.
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David Kirchner
David Kirchner is a Senior Program Evaluator with the Minnesota Office of the Legislative Auditor. In addition to his financial audits, the Legislative Auditor provides the Minnesota Legislature with independent, in-depth evaluations of programs managed or overseen by state government agencies. Topics are chosen by a bipartisan legislative committee.
David joined the office in 2006 and has worked on evaluations related to economic development, natural resources, human services, education, transportation and other policy areas. Prior to joining the Legislative Auditor's staff, he held teaching positions in the political science departments of Hamline University and Millikin University.
David holds a Ph.D. in political science from Washington University in St. Louis and a B.A. from Yale University. He lives in St. Paul.
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Brent Lane E. Brent Lane is director of the Carolina Center for Competitive Economies, part of the Frank Hawkins Kenan Institute of Private Enterprise, which works with communities to make strategic decisions and investments to become economically competitive and prosperous. Lane brings to this work three decades of experience at the state- and regional-government levels and within the nonprofit sector integrating programs and personnel to support targeted economic development initiatives. His professional expertise and research interests focus on the roles of technological innovation and emergent industry financing in economic competitiveness, venture capital, research commercialization, and entrepreneurial development in private, public, and university venues. Lane has created and directed numerous innovative economic ventures, ranging from a seminal seed capital investment fund to the first technology incubator in North Carolina's The Research Triangle Park™ to the design and launch of the largest community development venture capital fund in the United States.
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JULIE SREY
EVIDENCE COUNTS Evaluating State Tax Incentives for Jobs and Growth
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Trade-offs
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EVALUATE RESULTS
INFORM POLICY CHOICES
AVOID BLANK CHECKS $
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EVALUATE RESULTS
• Did the incentive affect the choices businesses made?
• Were existing businesses harmed by the incentive?
• Did the benefits outweigh the negative effects?
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EVALUATE RESULTS
• Is the program meeting the state’s goals?
• How could it be improved?
• Are the state’s incentives working together efficiently?
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Office of the Legislative Auditor State of Minnesota
Evaluating Minnesota’s
JOBZ Program
September 9, 2013
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JOBZ Program
• Economic development program begun in 2004
intended to spur employment in nonmetro Minnesota
• Tax breaks given to businesses that:
– Relocated or expanded outside the Twin Cities
metropolitan area
– Hired more employees, and
– Signed agreements with local governments to meet
certain goals
• Our evaluation was released in February 2008
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Key Criteria
• Did JOBZ assist economically distressed
communities?
• Did JOBZ increase employment?
• Did JOBZ help Minnesota compete with other states?
• Did the state agency effectively monitor participants?
• Did the state agency capably administer JOBZ?
• Were reports of program success accurate?
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Economic Distress
• Examined how the state agency had implemented
economic distress criteria outlined in law
• Conclusion: Statutory language extending the
program to more communities enabled the state
agency to ignore the economic distress criteria
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Employment
• Compared overall job growth in JOBZ regions to jobs
reported by program
• Used unemployment insurance data to check
employment increases at each participating company
• Reviewed actual requirements for hiring in
agreements signed with local governments
• Conclusion: State agency reports overstated
increases in employment due to JOBZ
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Competition
• Determined previous locations of participating
businesses
• Reviewed type of businesses
– Where were their customers located?
– Where were competitors located?
• Interviewed local officials
• Conclusion: JOBZ may have simply moved
economic activity around without increasing overall
regional employment
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Compliance
• Analyzed unemployment insurance data for
participating businesses
– Were they meeting their required targets?
– Had state agency identified those that weren’t?
• Examined tax forms filed by participating businesses
• Conclusion: Approximately one-third of participating
businesses may not have met their obligations
• Conclusion: The state agency’s compliance process
was exceptionally slow and did not catch all
noncompliant businesses
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Program Administration
• Scrutinized the commitments made by each
participating business
• Reviewed reporting forms used by state agency to
monitor program participation and accomplishments
• Examined other program documentation
• Conclusion: Numerous implementation problems
weakened the program
• Conclusion: Local governments allowed businesses
to enter the program with very minimal obligations
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Key Flaws Of JOBZ
• No statewide perspective guiding entry into program
• No limit on participation
• No checking to see if participants were competing
with other Minnesota firms
• Tax breaks were not proportional to number of jobs
created
• Sloppy administration
• Weak enforcement
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Lessons For Evaluators
• Don’t accept data at face value
– Independently verify if possible
– Look for unlikely outcomes
• Read the fine print
• Look beyond the program participants
• Examine compliance monitoring
• Find illustrative stories
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JOBZ Program is available at
www.auditor.leg.state.mn.us/ped/2008/jobz.htm
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Evaluating North Carolina’s
Tax Incentives
Brent Lane
Frank Hawkins Kenan Institute of Private Enterprise
Kenan-Flagler Business School
University of North Carolina
26 Kenan Institute of Private Enterprise
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NC’s
Tax Incentives
1996-2006
1996 created narrow TAX CREDITS for job
creation, investment and worker training
Expanded to add’l industries and all NC
GRANT incentives added later
27 Kenan Institute of Private Enterprise
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NC “Lee Act” Tax Credits
Up to $12,500 credit per new
job created
7% tax credit for capital
investments
5% R&D tax credit
Varying credits for training
Max. annual tax reduction
Carry-forwards = 5 to 30 years
28 Kenan Institute of Private Enterprise
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2007-09 Incentive Study
18 month, $300k multi-institutional
Prompted by high profile incentive deals
Legislative study committee convened
GRANT INCENTIVES …and Tax Credits
29 Kenan Institute of Private Enterprise
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30 Kenan Institute of Private Enterprise
Tax
Credits
98%
Grants
2%
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10 Year “Costs” > $2 Billion
$100
$343
$588
$851
$1,064
$1,242 $1,366
$1,541
$1,709
$1,916
$2,091
$- $11 $33 $100 $154
$228 $303
$382 $448 $539
$632
$-
$500
$1,000
$1,500
$2,000
$2,500
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Generated Taken
31 Kenan Institute of Private Enterprise
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What Does Success Look Like?
Made legislators specify evaluation criteria
Job creation
Distressed areas benefit
Economic competitiveness
Tax policy alternatives
32 Kenan Institute of Private Enterprise
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Task Granularity
Incentives use distribution
Firms’ pre/post incentive jobs
Incented/non-incented
employment change
Executive incentives surveys
Case studies on utilization
33 Kenan Institute of Private Enterprise
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Data Have
vs.
Data Need
Data needs required special legislation and security measures
Data and tax filings on 3,000+ incented firms from Revenue and Commerce departments
Pre/post incentive quarterly employment for each incented firm from NC ESC
34 Kenan Institute of Private Enterprise
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Most NOT
Jobs Based
Jobs
17%
Investment
66%
R&D
15% Training
1%
35 Kenan Institute of Private Enterprise
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Poorest
14%
LEAST to
Poorest
Counties
36 Kenan Institute of Private Enterprise
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Incentive
Portfolio
Analysis
“What Works Best?” not “Do They Work?”
Post incentive job growth by incentive type
Performance over time
Performance relative to NC economy
“Correlation first, causality later”
37 Kenan Institute of Private Enterprise
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0
500
100
0
Gro
wth
Ra
te in P
erc
enta
ge
0 200 400 600 800 1000 1200Lee Act Companies
1. 37 companies with growth rate greater than 1000% are eliminated from graph2. 697 (57.46%) companies' growth rates from 96 to 06 are positive3. 501 (41.30%) companies growth rates from 96 to 06 are negative4. 15 (1.24%) companies' growth rates from 96 to 06 are zero
Employment Growth Rate: Lee Act Companies with Single Location
1996-2006
38 Kenan Institute of Private Enterprise
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Investment Credit
130
140
150
160
170
Em
plo
ym
ent
1996 1998 2000 2002 2004 2006y ear
Average Employment for Companies ONLYReceiving Lee Act Machinery and Equipment Tax Credit in 2004
130
140
150
160
170
Em
plo
ym
ent
1996 1998 2000 2002 2004 2006y ear
Average Employment for Companies ONLYReceiving Lee Act Machinery and Equipment Tax Credit in 2004
39 Kenan Institute of Private Enterprise
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Job Creation Credit
80
100
120
140
160
180
Em
plo
ym
en
t
1996 1998 2000 2002 2004 2006year
Number of Companies: 38
Average Employment for Companies ONLYReceiving Lee Act Job Creation Tax Credit in 2004
40 Kenan Institute of Private Enterprise
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R&D Credit
120
140
160
180
Em
plo
ym
ent
1996 1998 2000 2002 2004 2006
Number of Companies: 41
Average Employment for Companies ONLYReceiving Research and Development Tax Credit in 2004
120
140
160
180
Em
plo
ym
ent
1996 1998 2000 2002 2004 2006
Number of Companies: 41
Average Employment for Companies ONLYReceiving Research and Development Tax Credit in 2004
41 Kenan Institute of Private Enterprise
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Credit Obsolescence
-5
0
5
10
G
row
th R
ate
in P
erc
enta
ge
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 year
State-wide Employment
incentive companies 96-06 (Number of Companies: 1213)
Employment Growth Rate: State vs. Incentive Companies with Single Location
42 Kenan Institute of Private Enterprise
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Economic Development Success
Isn’t Economic Success
1969: 79%
1973: 83%
1982: 81%
1989: 89%
1997: 93%
2006: 87%
75
77
79
81
83
85
87
89
91
93
95
1969 1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005
NC Per Capita Income as % of US
43 Kenan Institute of Private Enterprise
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Analysis
Findings
NC tax credits anachronistic/counter-productive
Diminishing ROI on increasing cost
Credits’ outcomes are contrary to NC goals
Negative effect on perceived business climate
Time to re-allocate “incentive portfolio”
44 Kenan Institute of Private Enterprise
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Analysis
Outcome
Recommended elimination of most tax credits,
grant increases, and corporate tax reduction
Findings incorporated into broad tax reform
initiative begun in 2009
Implemented in 2013 tax reform
45 Kenan Institute of Private Enterprise
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Lessons
“Day Zero” political leadership
ownership
Monthly meetings with legislators
Align metrics with consensus
strategic goals
Design around data need, not
availability
Address if even “successful”
tax credits matter
46 Kenan Institute of Private Enterprise
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Questions?
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Questions after the webinar
If you have any questions regarding this Webinar, please contact: Aron Snyder
This Webinar will be archived and will be available at the following link:
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Resources The Pew Charitable Trusts Website: http://www.pewtrusts.org/
Evaluating Tax Incentives Resources: http://www.pewstates.org/taxincentives
NCSL's Budget and Tax Homepage: http://www.ncsl.org/issuesresearch.aspx?tabs=951,61,161#951
The Minnesota Office of the Legislative Website: http://www.auditor.leg.state.mn.us/ The 2008 Evaluation of the Minnesota JOBZ Program:
http://www.auditor.leg.state.mn.us/ped/2008/jobz.htm
The Carolina Center for Competitive Economies Website: http://www.kenan-flagler.unc.edu/kenan-institute/about/organization/competitive-economies
An Evaluation of North Carolina's Economic Development Incentive Programs: Summary of Analysis, Findings and Recommendations, from 2009: http://www.kenan-flagler.unc.edu/~/media/Files/kenaninstitute/UNC_KenanInstitute_NCIncentivesStudy.pdf
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