A Look at How States Report Tax Expenditures and Evaluate Tax Incentives

On March 20, 2019, The Pew Charitable Trusts submitted a memo to Rhode Island’s Economic Progress Institute detailing the types of tax expenditure reporting that states do, including transparency reporting, compliance audits, budget-related reports, and evaluations/performance audits. The memo also includes options to help improve Rhode Island’s tax incentive evaluation and reporting process, such as enhancing the connection between evaluation and the legislative process, ensuring that data is available to facilitate evaluation, and exploring consolidation of existing reporting requirements.

To: Rachel Flum, Executive Director, Economic Progress Institute
From: Alison Wakefield, Khara Boender, Logan Timmerhoff, The Pew Charitable Trusts
Date: March 20, 2019
Subject: State Tax Expenditure Reporting

Introduction

States issue many different types of reports on tax expenditures. These reports often vary across states by purpose and level of analysis. They are released by both the executive and legislative branches and sometimes universities. One way to sort these reports is to classify them based on the purpose they serve: transparency reporting, compliance audits, budget-related reports, and evaluations or performance audits. Below are definitions and examples of each type of report, examples of unique reports done by other states, and ideas for how Rhode Island could improve its tax incentive reporting.

Transparency Reporting

Among other things, these reports describe companies that received incentive approvals; incentive amounts; new job commitment levels; capital investments; and wage information. These publications offer the public insights into how the state is spending its money and who is receiving benefits. For example, each year Virginia’s Economic Development Partnership publishes ‘Status and Progress Reports’ on its incentive programs.

Compliance Audits

Compliance audits assess whether a program operates in accordance with statutory requirements or whether businesses are meeting their obligations to receive incentives. One example is this report released by New Jersey’s Office of the State Auditor based on its investigation into whether incentive grants were awarded and monitored in accordance with the law.

Budget-Related Reports

These reports detail the fiscal impact of tax expenditures on states. For example, each year as part of its biennial Tax Expenditure Report, Oregon publishes a comprehensive list of tax expenditures that contains budgetary information for each tax expenditure, including revenue impacts broken into relevant categories (e.g. personal, corporate, state, local, etc).

Evaluations/Performance Audits

Evaluations (including performance audits) assess the effectiveness of tax expenditures by comprehensively analyzing how well a program is achieving its intended goals, whether it is designed appropriately, and administered responsibly. For example, Washington’s Joint Legislative Audit & Review Committee issues evaluations of all tax preferences at least once every 10 years. These reports provide valuable insights on the history, purpose, and design of incentives and can help inform policymakers’ decisions through clear recommendations to continue, modify, or end each incentive. Additional examples of evaluations are available in a database hosted by the National Conference of States Legislatures with support from Pew.

Unique reporting approaches

While many states produce a variety of reports that fit neatly into the categories we describe above, some do not. Below we present examples of interesting reports that are more unique.

Florida compiles county and municipal economic development incentive data

In 2010, the Florida Legislature enacted legislation requiring county and municipal governments that give economic development incentives worth at least $25,000 to report them to the state. The Office of Economic and Demographic Research (EDR) then compiles the data into a report that classifies all county and municipal economic development incentives in four general ways: direct financial incentives, indirect financial incentives, tax-based and fee-based incentives, and below-market rate leases or deeds for real property. Together, this provides a statewide picture of local government reliance on tax incentives.

Pennsylvania requires the executive budget to include tax expenditure analyses

In Pennsylvania, the Governor’s Executive Budget must include a tax expenditure analysis (revised and updated biennially) for taxes with historical annual receipts of at least $20 million. The analyses are intended to: identify indirect sources of budgetary support for various activities; present estimated costs associated with each tax expenditure; present actual or estimated costs of administering each tax expenditure; present actual or estimated numbers and descriptions of benefiting taxpayers; allow for administrative, legislative, and public scrutiny; and facilitate discussion on each tax expenditure’s merits. These analyses provide an additional opportunity for the legislature to review recommendations for modifying new incentive programs. The FY2019-2020 budget proposal also notes the Independent Fiscal Office’s role in reviewing and developing performance-based metrics and evaluating the efficiency of tax credit programs, which may lend to these recommendations being included in future budget proposals.

Virginia assesses impacts of previous reports

Virginia incorporates an additional level to the reporting process that is intended to improve the efficiency and effectiveness of state government. Per statute, the Joint Legislative Audit and Review Commission (JLARC) is required to provide two reports to the General Assembly: one provides a broad assessment covering the spending and performance of all incentives, published annually; the other provides in-depth evaluations of selected incentives according to a schedule determined on an ongoing basis. Additionally, JLARC produces a biennial report that assesses its own performance based on the number of implemented recommendations, the savings attributable to their implementation, and legislation introduced in response to JLARC’s recommendations. The report also highlights which recommendations were acted upon and those that are still outstanding. While not limited to economic development incentives programs, this report is an additional opportunity for JLARC to track the impact of their evaluation recommendations and bring outstanding issues to the forefront.

Options to improve Rhode Island’s evaluation and reporting process

Our research shows that Rhode Island has implemented a rigorous process to systematically evaluate its economic development tax incentives. One strength is the scope of evaluations—the Office of Revenue Analysis (ORA) is required to evaluate existing tax incentives at least once every three years. Any new programs the state enacts are evaluated within five years of going into effect—a long enough horizon to give incentives time to work before the state measures their results—and then subsequently every three years.

However, there are ways the process could be improved.

1. Enhance the connection between evaluation and the legislative process;
2. Ensure data is available to facilitate evaluation; and
3. Explore consolidating existing reporting requirements.

Enhance the connection between evaluation and the legislative process

It is important to provide opportunities for policymakers to use the evidence provided in evaluations to inform decisions. Rhode Island’s current evaluation law requires the governor’s budget proposal to include recommendations on whether to continue, modify, or terminate each incentive evaluated in the previous year. These recommendations are then subject to legislative budget hearings, which provides lawmakers with an opportunity to consider tax incentives alongside other state spending. Based on our review, we did not see such recommendations included in the FY20 budget. This could be due to the timing of the release of these reports and budget submissions and may be implemented going forward. In any case, there are other options to directly tie evaluation recommendations to policymaking.

In other states that regularly evaluate incentives, a specific legislative committee must hold hearings following an evaluation’s release to discuss the results, receive inputs from stakeholders, and consider policy options. Putting this type of process in place could be as simple as mandating that relevant existing committees hold periodic hearings on the evaluations. Mississippi and Washington both use the state’s existing committee structure for this purpose. Others, including Arizona, Iowa, and Maryland, have created new committees to review incentives. Regardless of whether policymakers ultimately decide to implement each of these recommendations, they should help spark a constructive discussion and meaningful next steps to improve policy. Many states have found that legislative hearings on the results of evaluations are helpful in this regard.

Ensure data are available to facilitate evaluation

ORA’s tax incentive evaluations reports proposed ways to strengthen future evaluations, primarily by improving the data available for the reviews. For example, several incentives subject to evaluation are not currently included in the annual “Tax Credit and Incentive Report,” which lists the names of each claimant and the value of the credits they receive. Because the data are not reported publicly, confidentiality rules limit ORA’s ability to fully assess the economic and fiscal impact of these programs. For those incentives that are included in the report, the office has suggested ways to improve the available data, such as revising past year numbers to account for filing extensions, amended filings, or audit findings that changed the amount of credits claimed.

Explore consolidating existing reporting requirements

The Economic Progress Institute’s brief, How effective are Rhode Island’s reports on economic development tax incentives at facilitating accountability and transparency, identifies five reports that are currently prepared to provide information on the state’s economic development tax incentives and summarizes the type of information provided in each.

If Rhode Island explores the possibility of consolidating existing reporting requirements, there are several things the state will want to think about. One important consideration is ensuring that sources of beneficial information are not inadvertently lost. For instance, ORA notes in some of their evaluations that they can report the results of detailed analyses because of recipient information available in the “Tax Credit and Incentive Report.” In other instances, they are not able to report the same level of detail because recipient information is subject to stricter confidentiality standards. Having a full understanding of how each stakeholder uses these reports will be an important step should the state decide to streamline its existing reporting processes.

One way to expand on the information already synthesized in EPI’s brief may be to compare each incentive and the type of information that is reported on them and in what reports. Taking this perspective may help identify gaps and duplication. If the state does create a new reporting system, ensuring that the scope of the reports covers all existing and future incentive programs, as is required in the 2013 evaluation legislation, will be an important step to avoid piecemeal reporting.

Another issue to consider when thinking strategically about the state’s reporting requirements is the information that businesses are required to report as a condition for receiving incentives and whether this information is used strategically. Washington state’s experience may be informative in this regard. Washington reviewed and adjusted their business reporting requirements to reduce redundancy and require only essential information. Statute previously required businesses claiming incentives to file an annual report and annual survey with the Department of Revenue (DOR). In 2013 the legislature directed DOR and JLARC to review the annual report and annual survey and make recommendations on how the data collected through each form could be made more relevant while making them less burdensome to taxpayers. Legislators then adopted a number of these recommendations, including combining the two reports. Effective January 1, 2018 the Annual Tax Performance Report replaced the annual report and annual survey, streamlining reporting requirements for recipients. An additional measure allows businesses to opt into authorizing the DOR to obtain the information directly from the Employment Security Department. Data provided for the Annual Tax Performance Report is used to produce the statutorily-required Descriptive Statistics Report, which summarizes taxpayer information. The report is intended to provide accountability and a means to evaluate program effectiveness and must be submitted to the legislature by December 31^st each year.