Making Sense of Tax Incentives

Massachusetts is taking a hard look at the tax breaks it hands out for economic development. The result may be a move toward using objective metrics to inform decisions about granting them.
by | May 24, 2012 AT 5:00 PM

Last month, I wrote about the proliferation of economic-development tax incentives and a study from the Pew Center on the States which concluded that no state requires policy makers to rely on good evidence when making decisions about credits, exemptions, deductions or other tax breaks. That will no longer be the case if Massachusetts lawmakers and Gov. Deval Patrick implement the recommendations of a state commission that is calling for fewer and less generous tax breaks.

Last year, the state's leaders formed a Tax Expenditure Commission to review the commonwealth's web of tax breaks, also known as "tax expenditures," after Evergreen Solar, a clean-energy company that received more than $30 million in state grants and tax and lease breaks before ultimately filing for bankruptcy, closed its Massachusetts factory.

The commission's report was forwarded to the legislature on April 30, and it turns out that Evergreen is just the tip of the iceberg. Overall foregone state revenue from tax breaks (not just those for businesses and economic development) will be an estimated $26 billion next year, more than the total amount of tax revenue the commonwealth expects to collect, according to the report. And a 2011 analysis of 92 business tax breaks by the state auditor found that only a few came with mechanisms for reviewing their effectiveness or recovering lost revenue if the tax breaks failed to produce the expected economic benefits.

The recommendations of the commission, whose members include the Bay State's budget chief, statewide officeholders, legislators and economists, would provide guidelines to the granting of tax breaks that until now appear to have been handed out on an ad hoc basis.

First, they call on the governor and legislature to work together to identify a public-policy purpose and desired outcomes for each tax expenditure. Next, the commission asks the state budget office to work with the Department of Revenue to identify metrics and collect the necessary data for assessing the tax breaks' effectiveness. Once the data are available, the budget office would also make recommendations to the governor and the legislature about tax expenditures that should be eliminated or modified.

The commission recommends that certain tax breaks expire every five years unless they are affirmatively renewed. All should be reviewed every five or ten years, depending on the type of tax expenditure. Clear conditions and commitments by the recipients should accompany each tax break, along with enforcement mechanisms in case those commitments aren't met.

In addition, the commission proposes guidelines for handing out future breaks. Each should have a clearly stated purpose and a desired outcome, include a finding of why the tax expenditure is expected to effectively achieve that outcome, and be accompanied by an estimate of foregone revenue. The commission also would impose an overall annual cap on foregone revenue.

With Massachusetts likely to forego more in tax breaks than it collects in tax revenue next year, it is a good candidate to be the first state to pursue a more objective, evidence-based approach to decisions about granting those breaks. Once revenue is recovered, subsequent debates about whether to use it to reduce taxes, enhance public services or a little of both would be a welcome change for the state's leaders after several years of battling bad economic times and a rising tide of red ink.