Pew: Utah is ‘trailing’ in evaluating tax incentives

Utah is fortunate that Governor Gary Herbert and the Legislature have made significant efforts to improve Utah’s economy and lessen government’s involvement in the free market. We hope they will continue these commendable efforts by closing a gap in Utah’s economic development policies.

The Pew Center on the States – the same organization that gave Utah its “best-managed state” ranking – released a report today saying that Utah is “trailing behind” in evaluating the effectiveness of its tax incentive programs.

This report comes just as two new tax incentive packages were announced in Utah. Two weeks ago, the Governor’s Office of Economic Development (GOED) handed out an offer for another multi-million dollar tax break ($3,764,578) to Family Dollar Stores Inc., and just this morning it approved a cash rebate of up to $375,000 for an Indian company to produce a film in Utah of a “multi-faceted Bollywood love story.”

These new tax deals are just two of the more than 100 deals offered companies since 2006 – worth a total of nearly $600 million – with promises of tens of thousands of new jobs. The promise of more jobs in Utah is always encouraging, especially to those who are or have been seeking employment in this slowly recovering economy. But are these deals actually producing these promised jobs? 

Standards of good governance dictate that huge tax incentives like these should be accompanied by strict transparency and accountability measures to protect taxpayer dollars, especially in times of tight budgets for public schools, law enforcement and other essential government services. Unfortunately, Pew’s new report finds Utah’s incentive programs lacking in this regard.

The report – Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth – assessed how all 50 states provide “much-needed answers about tax incentives’ effectiveness.” It concludes that 13 states are “leading the way,” 12 have “mixed results,” and 26, including Utah, are “trailing behind.”

The report examined to what degree state evaluations of incentives do the following:

1. Inform policy choices
2. Include all major tax incentives
3. Measure economic impact
4. Draw clear conclusions

Utah failed to meet Pew’s standards in all four of these areas. According to their research, 16 states, including Utah, “did not publish a document between 2007 and 2011 that evaluated the effectiveness of a tax incentive.” Pew also concludes generally that “policy makers spend billions of dollars annually on tax incentives for economic development, but no state ensures that policy makers rely on good evidence about whether these investments deliver a strong return.”

So when news headlines report that GOED incentive deals will create hundreds of jobs and millions in economic activity, what do those numbers represent? Unfortunately, they are merely projections or guesses (even if educated guesses) of what might happen anywhere from one to 20 years down the road. They reflect not what will happen, only what might happen.

What should we do to rectify this situation? The Pew report recommends “[r]egular, rigorous, and comprehensive evaluations of tax incentives” to determine whether they “deliver a strong return on investment.” For example, states should isolate the actual impact of the tax incentive rather than “assume the economic impact resulted from the incentive alone,” and they should evaluate “based on good analysis … whether the incentive was meeting the state’s goals.”

One crucial aspect of this analysis, rarely done in Utah (but recently incorporated into Louisiana’s economic development policy, as an example), should be whether tax incentives truly create new jobs and economic activity or simply shift them from other Utah businesses to those receiving incentives.

GOED’s lack of transparency and accountability is an ongoing concern. In 2007, Good Jobs First gave Utah an F grade for the amount of information it discloses regarding its corporate incentive programs, and in a December 2010 update, it upgraded the state slightly to a D+. The state scored low on this study because it reports only projections of economic activity, not actual data, and because it fails to disclose basic information about incentive packages offered and companies that receive them.

Maybe state tax incentives do lead to good jobs for Utahns, maybe they don’t. The concern raised by both of these reports is that we just don’t know, because the lack of transparency and accountability involved means we don’t have the facts.