North Carolina needs evidence-based approach to economic development tax expenditures
Earlier this week, the Pew Center on the States released a report comparing the ways in which different states evaluate the costs, benefits, and effectiveness of their economic development incentive efforts. As we mentioned in this space yesterday, the report ranked North Carolina as a national leader in these efforts, with room for improvement in only one category—the state’s capacity to use the evidence gained from these evaluations to shape future policy.
Aside from a permanent oversight committee to handle this process for the legislature, the report also suggests that states like North Carolina can improve their ability to conduct evidence-based policy making by ensuring that economic development-related tax expenditures are both performing as promised in terms of job creation and economic growth and can be eliminated if ineffective. In 2011, the state spent $9.2 billion on 318 tax exceptions, exclusions, refunds, and credits, most of which are targeted to benefit specific industries.
Although the N.C. Department of Revenue’s excellent Biennial Tax Expenditure Report provides a comprehensive and detailed listing of number of tax expenditures and their costs in foregone revenue, the state lacks a formal process for evaluating the economic costs and benefits associated with these credits. Given that many of these tax expenditures are permanent and are not subject to annual reviews, many of them can continue indefinitely with little awareness from policy makers on how well they are performing.
To address this problem, the report suggests requiring that the effectiveness of every tax expenditure be periodically reviewed by the legislature and that every new expenditure be subject to a sunset date to ensure that ineffective programs do not simply continue on autopilot irrespective of their economic performance. Although more work certainly needs to be done on developing strategies for evaluating and shaping tax expenditure policy, these recommendations make a great first step in ensuring that North Carolina’s tax policies are effective and properly aligned with its economic development efforts.