Why Many States Don't Know if Tax Breaks for Businesses Work

corporate taxes
A blimp reading "Google must pay tax" floats over the skyline in Tel Aviv, Israel on April 3, 2016. REUTERS/Baz Ratner

Almost half of all U.S. states aren't effectively measuring whether billions of dollars in business tax incentives have any impact on the local economy, according to a new report from Pew Charitable Trusts.

The report, which was released in early May, found that 23 states lack the proper means of evaluating the fiscal repercussions of offering companies tax credits or deductions to keep their work in-state.

Among them: California. The state's research and development credit, which costs $1.5 billion per year, for instance, has not been monitored in any way, a state audit from 2016 concluded.

The report also suggests one the California's biggest business incentives, the Enterprise Zone Program, has not worked to boost net employment as intended—despite costing the state $750 million in 2014.

But the programs that are monitored have provided the state with valuable information on how they are working, the report found; proper monitoring of the state's Enterprise Zone Program prompted California to invest more money to tackle its problems, potentially boosting employment in the state.

"When lawmakers have this information, they use it," the report stated.

"Changes both large and small—from ending ineffective programs to subtly modifying the design or administration of incentives—can greatly improve the effectiveness of state economic development efforts."

Some states, the report found, didn't monitor tax incentive programs effectively either by failing to put a program in place, or because the evaluation was sporadic or ineffective.

In Delaware, the Pew report found regular monitoring and assessments. But the state failed to put forward policy recommendations linked to the success or failure of its tax incentives, among other things.

The report also found that 18 states were making progress towards properly assessing the impact of tax breaks, while 10 states—Florida, Indiana, Iowa, Maine, Maryland, Minnesota, Mississippi, Nebraska, Oklahoma, and Washington—were excelling at understanding these incentives.

For the 23 states failing to effectively monitor the outcome of corporate tax breaks, the report recommended putting a plan in place to monitor and evaluate their impact, and using the results to influence policy.