How States Can Set Effective Sunset Dates for Tax Incentives

In a Sept. 29, 2020, memo to the Massachusetts Office of the Senate President, The Pew Charitable Trusts shared research that demonstrated how policymakers in other states have used evaluation findings about tax incentives to inform program modifications, specifically about establishing expenditure expiration dates and tying those dates to program evaluations. 

To: Douglas Howgate, Senior Policy Advisor, Massachusetts State Senate, Office of Senate President Karen Spilka
From: Khara Boender and Alison Wakefield, The Pew Charitable Trusts
Date:  September 29, 2020
Subject: Establishing program expiration or “sunset” dates, tying sunset dates to program evaluation, and how evaluation findings shape program modifications.

To follow up on your request for additional information during our recent call, this memo provides examples and resources related to establishing expenditure expiration dates, tying expiration dates to program evaluation, and examples of how state policymakers have used evaluation findings to inform program modifications.

Establishing expiration or “sunset” dates and tying sunsets to evaluation

When a tax expenditure is scheduled to expire, lawmakers need reliable information to determine whether it should be continued and in what form. High-quality evaluations can provide this information. For that reason, sunset dates work best in tandem with evaluations. Oregon, Maryland, and Washington have made efforts to ensure evaluations are conducted in advance of expiration dates

At least six states—Illinois, Missouri, Nevada, Oregon, Virginia, and Washington—have laws in place requiring sunsets to be applied systematically to newly created tax expenditures. These sunsets can differ in scope – for example, Virginia requires five-year sunsets on all new income tax credits while Washington requires 10-year sunsets on all tax expenditures.

A 2009 law requires virtually all of Oregon’s tax credit programs to expire every six years unless lawmakers choose to renew them. As a result of a 2011 study of 18 expiring credits, the legislature allowed some little-used credits to expire and extended or redesigned others. In particular, legislators modified a credit for a renewable energy project – in addition to increasing the program’s cost-effectiveness, the changes were expected to save Oregon $20 million over the following two years and hundreds of millions of dollars after that period.

In an early version of Montana’s evaluation bill, legislators sought to establish sunset dates for existing credits in addition to setting a ten-year limit to extensions and renewals. Ultimately, these provisions did not make it into the state’s evaluation law.

You can refer to page 21 of our report, “How States Are Improving Tax Incentives for Jobs and Growth,” for a bit more information.

Modifications informed by evaluation findings

Evaluations can help lead to substantive conversations about the nuances of expenditures and lead to improvements. Subtle decisions, such as how expenditures are structured and how eligibility requirements are administered, can make the difference between those that achieve their goals and those that prove to be costly disappointments. Evaluations can help get the details right and offer evidence of what is working, what isn’t, and provide suggestions for improvement. Below we provide examples of states that implemented nuanced changes as a result of evaluation findings and subsequent discussions.

Maine

Maine’s Pine Tree Development Zones program is one of the state’s primary economic development tools, however, a 2017 evaluation by the Office of Program Evaluation and Government Accountability found that a business could claim tax incentives for up to two years by promising to create jobs. As a result, in 2018, Maine legislators passed a reform that now requires businesses to prove that they created at least one eligible job before receiving benefits.

Maryland

A 2015 evaluation of a tax credit for rehabilitating historic buildings described the credit as a model program, noting that lawmakers had established key protections to ensure the program’s cost was predictable from year to year. However, the report also highlighted ways to improve the credit. For example, the evaluation noted flaws in the scoring system state officials used to determine which commercial projects would qualify for the incentives. In response, lawmakers enacted legislation to extend the program for another five years while also making modifications to the scoring system. In 2017, legislators enacted legislation that implemented five recommendations from a 2016 evaluation of the state’s job creation tax credit. These changes: increased the value of the credit; allowed businesses to claim the full value of the credit in one tax year; lowered the job creation threshold in certain counties; changed the wage requirements for qualifying jobs to be at least 120% of the state minimum wage, and; modified certain verification and reporting requirements.

North Dakota

As North Dakota’s legislature meets biennially, its evaluation process is fairly unique – during the 20-month period between legislative sessions, lawmakers serve on the committee tasked with evaluating specific economic development incentives. Lawmakers have used the evaluation process to make several policy changes intended to benefit the state and the economy. In 2017, lawmakers enacted legislation that included reforms intended to increase the in-state impact of the Angel Fund Investment Credit by more directly targeting North Dakota businesses. These changes were based on findings from the 2015-16 interim committee – the committee found that from 2011 to 2015, 55 of 116 companies claiming the credit were located out of state. North Dakota also created a new incentive after the 2017-18 interim committee determined that the state could benefit from a new credit to support its manufacturing sector when companies reported they were struggling to find qualified workers.. 

For more state examples of policy changes informed by evaluation findings, please refer to our legislative session recaps from 2019, 2018 and 2017.