The debate over tax incentives for businesses is blazing hotter than ever in Texas and in Austin, and yet within that maelstrom a fundamental set of questions have gone begging for a conclusive answer.
Do these tax breaks produce a net gain for the state and local economy? And do we even have enough evidence to know whether we should expand, tweak or abolish the various incentive programs?
To date, neither state nor local governments in Texas have established a comprehensive, systematic set of guidelines for a transparent, thorough and credible assessment of how well these incentive agreements are working -- frustrated both by the relative newness of current incentives programs and the complexity of measuring the broad economic costs and benefits of such deals.
Any comprehensive approach, experts said, would require a methodology that is standardized enough to provide actionable results, yet flexible enough to account for the vast differences in programs, goals and terms of each deal. Yet despite the difficulty, there's broad consensus that state and local governments must develop a more systematic way to assess the net result of these deals.
"Right now, people can pick and choose the numbers they want to support or criticize the programs," said Dale Craymer, president of the Texas Taxpayer and Research Association. "We need a set of science-accepted standards, one that economic development experts look at and say, 'Yes, this is an appropriate way to evaluate these programs.'"
Like many states, Texas has produced mixed results in its efforts to evaluate tax incentive programs, according to an April 2012 report from the Pew Center on the States. The report, entitled "Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth," found that only 13 states have taken a progressive approach to those evaluations.
In terms of scope, Texas scored well because it reviews all its incentive programs, but it hasn't established a processes to funnel that data and knowledge back into policy decisions. In terms of the quality of its assessments, the report said, the state's reviews produce clear conclusions, but those results don't measure the programs' full economic impact -- so there's no definitive accounting for the net results.
Texas is far from alone in that, the Pew researchers found.
"(N)o state regularly and rigorously tests whether those investments are working and ensures lawmakers consider this information when deciding whether to use them, how much to spend, and who should get them," the report said. "Often, states that have conducted rigorous evaluations of some incentives virtually ignore others or assess them infrequently. Other states regularly examine these investments, but not thoroughly enough."
The good news? The report found that several states have developed a collection of promising, if incomplete, approaches.
"This is absolutely where we have been headed, are headed, will be headed, and should be headed," said Sherri Greenberg, director of the Center for Politics and Governance at the University of Texas' Lyndon B. Johnson School of Public Affairs. "This is basic, sound public financial management."
Economic experts and policy makers struggle to define what a systematic, transparent and trustworthy assessment would look like.Some of the measurements are no-brainers -- the number of jobs, the wages they pay, the balance of taxes that companies pay after the incentives. But the complexity grows quickly as audits move beyond those easily measurable metrics.
"You can look at historic patterns like retail to see how sales taxes are affected," said John Rees, the economic development program manager at the Capital Area Council of Governments. "Some of this is relatively diffuse, so you do have to make assumptions. But because of the data that is available, you can test some of the assumptions."
Developing a credible measure of the broader effects -- the ability of one company's operations to attract and spinoff other businesses, for example -- is even harder to substantiate. And the same goes for drains on resources, including unexpected costs, unintended consequences and negative fallout that arise from a new project.
Ultimately, any attempt to measure the full economic cost-benefit for an incentive deal requires a large dose of educated guesswork. That takes time, expertise and money that few local government entities have at their disposal, according to the Lincoln Institute of Land Policy.
Because of those restrictions, the institute noted, the "assessments of property tax incentives, which primarily affect local revenues, may be even less common than suggested by the Pew report on state evaluations." The Lincoln report recommended greater transparency on tax incentive agreements "to make it possible for outside researchers to conduct evaluations."
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