Riveting I tell you.
At at the behest of State officials the Northampton City Council recently moved to expand the Tax Increment Financing program for Kollmorgen. This will cost local taxpayers a little more than $10.6 thousand a year over a thirteen year period or about thirty-seven cents per capita annually, while preserving and hopefully adding jobs and tax revenues to the city. Seems like a no-brainer, but is this the best way to go?
The Massachusetts Budget and Policy Center released on December 2 an informative new brief (html) on Economic Development Tax Expenditures and their effectiveness.
Excerpts from its Introduction:
The effectiveness of these tax expenditures is rarely examined in any detail and very little data is available to analyze. This brief first examines how much the Commonwealth spends on economic development tax expenditures, how that has changed over time, and how it compares to other elements of state spending both for economic development and other purposes. In addition, this brief outlines improvements that could make it easier to evaluate the effectiveness otax expenditures.
Tax expenditures are in many ways similar to direct appropriations. Both seek to achieve certain policy goals through the use of the state’s economic resources, and both have an effect on the state’s bottom line. A primary difference is that budget appropriations must be reauthorized by the Legislature each year, while tax expenditures remain in effect without the Legislature having to take action.
Massachusetts spends billions of dollars in tax expenditures each year, and those designated for economic development purposes constitute a large sum. As the data below show, the state’s reliance on economic development tax expenditures has been increasing, compared to on-budget appropriations for similar purposes. Given this trend, the Commonwealth should take a closer look at whether or not these expenditures are meeting their intended goals.
Other notable highlights from the brief in random order (footnotes have been removed):
- The majority of economic development tax expenditures are concentrated in the corporate excise tax category, which accounts for 63 percent of all economic development tax expenditures. Personal income tax accounted for 15 percent and sales and use tax accounted for 22 percent.
- Because some businesses—those that are not organized as corporations—pay taxes through the personal income tax, the cost of some economic development tax expenditures shows up as reduced personal income tax revenue. The sales and use tax is levied on retail sales, including those purchases made by companies for business purposes such as machinery and equipment.
- The gap between tax expenditures and budget appropriations for economic development has widened over the years. As tax expenditures grew, economic development budget appropriations actually declined by an average of 8.2 percent annually, pointing to the growing prominence of tax expenditures over budget appropriations toward achieving economic development goals.
- The growth of tax expenditures for economic development has also outpaced the growth of budget appropriations overall. Between 2002 and 2010, as economic development tax expenditures grew at an average of 3.8 percent yearly, the overall budget only increased at an average of 0.9 percent annually. Even with significant budget cuts in the last year — from FY2009 to FY2010 total budget appropriations fell by 2.8 percent and budget appropriations for economic development dropped by 34 percent– tax expenditures for economic development have still grown, with an increase of 4.2 percent. One reason for this is that tax expenditures do not need annual reauthorization by the Legislature, while budget appropriations do. Particularly in economic recessions, budget appropriations are cut back to accommodate budget shortfalls.
- As mentioned above, in addition to devoting resources to tax expenditures and budget appropriations targeted for economic development, the state also spends resources in other areas that contribute to the Commonwealth’s economy. Education, which is critical in building up a strong and competitive workforce, is one important long-term state investment. In 2002, the state spent roughly the same amount on economic development tax expenditures and higher education. Since then, spending on economic development tax expenditures has increased by $444 million while higher education funding has decreased by $176 million. The state now spends $628 million more on economic development tax expenditures than on higher education. This is an example of the state decreasing resources for more long-term investments while at the same time increasing spending on short-term solutions, such as the tax breaks and incentives included within economic development tax expenditures.
- ECONOMIC DEVELOPMENT TAX EXPENDITURES ARE SUBJECT TO LITTLE PUBLIC SCRUTINY. As mentioned above, tax expenditures occur automatically—meaning that they do not require the Legislature to take action for them to remain in effect. When the Legislature and Governor elect to create a new program, or expand an existing one, the funding for these programs must be approved year after year, no matter how dire the need they meet or how popular they may prove with the public. The merits for sustaining the programs are weighed carefully in light of the overall budget priorities and incoming revenue for that year. In contrast, when a new tax expenditure is created, it generally remains in effect year after year—regardless of changing economic or fiscal conditions, or broader consideration of the relevance of the tax expenditure. Thus, tax expenditures can continue without consideration of possible merits, faults, or need.
- SHOULD TAX EXPENDITURES FOR ECONOMIC DEVELOPMENT BE SUBJECT TO THE SAME SCRUTINY AS BUDGET APPROPRIATIONS? Tax expenditures represent a growing share of our economic development resources. These tax expenditures represent a trade-off — for every dollar the state fails to collect due to a tax break, it has one fewer dollar to devote to another priority. Nearly $1.7 billion will be spent on economic development tax expenditures in fiscal year FY2010 alone. And because most of these tax breaks continue year to year, the cumulative cost over the lifetime of these tax breaks is much greater. As the state budget shrinks, economic development tax expenditures continue to grow at an average of almost 4 percent between FY2002 and FY2010. Consequently, the question must be asked: are these tax expenditures the most effective means of promoting economic growth?
- HOW CAN POLICYMAKERS, RESEARCHERS AND ACTIVE CITIZENS EVALUATE TAX EXPENDITURES? In order to judge whether or not a tax expenditure is effective, it is important to consider the policy goal of that tax expenditure, the cost and the behavior or actions the tax expenditure has brought about. In addition, the ability to compare the initial estimates of the cost of a tax expenditure to the actual cost would provide important information on cost control and effectiveness. Unfortunately, a great deal of information about tax expenditures is not available to policymakers, researchers or the public — making informed evaluations of tax expenditures difficult. However, some specific changes to the Tax Expenditure Budget could be made to allow for far more informed discussions of tax expenditure policy:
- Provide information on the purpose and effectiveness of each tax expenditure
- Provide disaggregated information for tax expenditures
- Provide tax expenditure information for all sources of tax revenue
- Provide projections for the cost of tax expenditures when they are created and then compare these projections to actual cost in later years
- Provide cost estimates for every tax expenditure
- Provide information on local tax expenditures
Visit http://www.massbudget.org/documentsearch/findDocument?doc_id=710&dse_id=1028 for the full narrative on these bulleted suggestions.
For a listing of Fiscal Year 2010 Economic Development Tax Expenditures see: http://www.massbudget.org/documentsearch/findDocument?doc_id=710&dse_id=1025
