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January 18, 2010

Tax Incentives: All Carrot And No Stick | Commonwealth to spend $1.7B on luring, retaining businesses

The state is set to put $1.7 billion on tax incentives for economic development in fiscal year 2010. That’s a 4 percent increase over the previous fiscal year and it comes at a time when nearly every other piece of the state budget is being cut.

Perhaps that disparity wouldn’t be so striking if there were some way to gauge whether the state gets its money’s worth by foregoing tax revenue to benefit the firms it wants to attract to or keep in Massachusetts.

Such measurements of effectiveness do not exist, according to state officials and economists. And the state’s current budget mess has legislators, economists and policy watchers wondering how such accountability could be developed.

Number Crunchers

Jennifer Weiner, a policy analyst at the Boston Fed’s Public Policy Center, recently authored a report entitled “State Business Tax Incentives: Examining Evidence of their Effectiveness.” She said attempts to hold tax incentives up to the light run into two problems: The state doesn’t keep data on the effectiveness of tax incentives, and “methodological issues.”

The methodological issues stem from the fact that “you really want to compare what happens with incentives in place versus what would’ve happened without it, but you can’t really see that second piece,” Weiner said.

In other words, how can the public know what a company would have done without a tax incentive from the state? Would it have headed south to warmer climes, or would it have remained?

The lack of data collected riles some legislators, including state Sen. Benjamin B. Downing, D-Pittsfield.

“There hasn’t been enough scrutiny or oversight so we can say this one works and is necessary and this one doesn’t,” Downing, chairman of the legislature’s Joint Committee on Revenue, said.

“The only pattern is that there is no pattern, and that in and of itself is troubling,” he continued. “Revenues are being foregone, and if we’re going to forego revenues at a time like this, I would hope the revenues we’re not collecting are working for things we want, namely job creation and job growth.”

Downing and the Fed’s public policy center aren’t the only ones with an eye on the incentives dilemma. In a recent report, the nonprofit Massachusetts Budget and Policy Center noted that, “Each year the state spends more than $1 billion on economic development tax expenditures, and yet little information on how this spending has improved the economic climate in Massachusetts is available.”

The budget and policy center and others use the term expenditure to cover the state’s system of tax incentives, exemptions, deductions, credits, deferrals and the creation of special tax rules in the name of spurring economic development.

The other fault some find with tax incentives is that they are not subject to regular legislative review.

They are part of the governor’s budget recommendation, but unlike regular appropriations set out in the governor’s budget each year, tax incentives remain on the books every year without the legislative reauthorization required for other line items. So, as other portions of the budget are cut, the tax expenditure budget grows.

One of the more striking examples of this disparity comes from the state’s public higher education budget.

According to the budget and policy center, in 2002, the tax expenditure budget and the budget for public higher education were about the same. Since then, the tax expenditure budget has increased by $444 million while the higher education budget has decreased by nearly $200 million.

In fiscal 2010, the tax expenditure budget is $1.7 billion. It was about $1.6 billion in the previous fiscal year. The public higher education budget will be $1 billion and has been flat since the 2008 fiscal year.

In the state’s higher education budget, adjusted for inflation, Fitchburg State College is slated for $27.8 million in 2010 compared to $29.9 million in 2002. Worcester State College is budgeted for $23.6 million compared to $24.9 million seven years ago and Quinsigamond Community College in Worcester will get $15.2 million compared to $17.6 million in 2002.

Tax Shelter

The budget and policy center argues in its report that providing information about the efficacy of tax incentives is neither unprecedented, nor onerous.

The budget and policy center said, “Some specific changes to the tax expenditure budget could be made to allow for far more informed discussions of tax expenditure policy.”

For example, the budget and policy center says that the state should provide a rationale for why each tax incentive was created, rather than just a description, which is all that is currently available.

The center notes that Delaware manages to make far more information about the cost and effectiveness of tax incentives available to the public through its “Delaware Tax Preference Report.”

The center also argues that the state could track how many companies apply for incentives and how many jobs are created by the firms that receive those incentives. With that information, the state could estimate the cost of the tax incentive per job created.

For now, legislators have a hard enough time just trying to follow where the incentives are going.

Though it hasn’t been tracked specifically, Downing said most of the incentives awarded from the $25 million provided by the state’s $1 billion Life Sciences Initiative (see related sidebar on facing page), have been awarded to companies within Route 128 even though Worcester and Springfield have made solid efforts to lure life sciences firms.

Obviously, industries, individual firms, neighborhoods and low income residents are benefitting from the state’s tax incentive programs. And in some cases, the state benefits as well. Both Downing and Weiner point to the film tax credit as a success, but lament the lack of actual detailed analysis of that success.

“A strong argument can be made that were it not for that credit, none of those movies would have been filmed here,” Downing said. Those movies include “Gone Baby Gone” and “The Departed” as well as yet-to-be-released films such as Bruce Willis’ “The Surrogates,” which filmed in part in Worcester.

And Weiner noted that states like Connecticut and Michigan have jumped into the film tax credit pool, as well. Michigan’s film credit is even more generous than Massachusetts’, she said. It’s gotten to the point where even New York and California, the traditional centers of film and television, are offering similar tax credits as a way to retain that business rather than lose it to competing states.

According to the Massachusetts Budget and Policy Center, that would be a first.

“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,” it said in its report.

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