KY Policy Blog

Growth of Economic Development Incentives Comes with Little Accountability

By Jason Bailey
April 13, 2012

Two new reports released this week call attention to the growth of state economic development tax incentives and the lack of accountability mechanisms that would enable states to know what they are getting for those subsidies.

In its new report “Evidence Counts,” the Pew Center on the States notes that states spend billions of dollars each year on tax incentives to attract businesses without adequate measures to assess whether those incentives deliver the needed return for the investment.

The report identifies 13 states as “leading the way” toward greater assessment and accountability. Pew particularly holds up Washington, which conducts regular analysis of all of its tax incentive programs and has a citizens commission that uses the analysis to make recommendations to lawmakers on whether and how programs should change. The report also highlights Oregon for requiring its incentive programs to expire periodically unless renewed by the legislature.

Unlike the leading states for incentive accountability, Kentucky is given credit in the report only for producing one evaluation of its economic development programs in 2007. That report found that the incentive programs were very expensive for each job produced—a lot more expensive than a state job training program. The legislature passed a resolution in 2011 to produce a new study on the topic by December 2011, but that study has not been released.

The Pew Center report recommends that states: 1) incorporate evaluation of incentive programs into lawmakers’ policy and budget deliberations; 2) evaluate all major tax incentive programs; 3) look at the economic impact of the programs; and 4) draw clear conclusions in the evaluations.

A report by Goods Jobs First, also released this week, focuses on the growing use of a subsidy that Kentucky pioneered back in 1988—the diversion of individual employee income taxes away from states and to the companies that employees work for. 16 states have moved beyond simply forgiving corporations’ taxes to actually giving companies all or a portion of the individual income taxes withheld from their employees’ paychecks (with the employees getting credit against their individual income taxes owed). The report says that those incentives—called job assessment fees—cost Kentucky about $57 million in 2010.

The reports show that the issues raised in MACED’s 2005 study of Kentucky economic development spending are still relevant today. The state needs mechanisms that allow much greater scrutiny of how we use tax incentives in order to make better decisions about how to allocate scarce public dollars.

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