How Local Governments Evaluate the Effectiveness of Tax Breaks on Economic Development
Larry Alton / November 12, 2014
Local governments often offer tax breaks and other financial incentives in order to entice developers to add infrastructure and jobs to the community. According to an article on Governing.com, many of these governmental entities are not spending enough time ensuring that the developers are being held accountable for their promises of adding jobs or increasing local revenue streams. When the local governmental entities do perform effectiveness evaluations, they can use these economic analysis tools to evaluate the costs and benefits of offering incentives.
Cost and Benefit Analyses
The primary tool used by local governments in the determination of whether or not tax breaks are worthwhile as a tool for spurring economic development is the classic cost and benefit analysis. Approximately 73 percent of local governments offering economic development incentives conduct this type of study upon the completion of the probationary incentive period. Because local governments do not typically have an economist on staff, the methodologies around cost and benefit analyses may be questionable. However, for local governments with limited staff and resources, this method may be the fastest and simplest one available.
Enactment of Performance Measures
Only a minority of local governments stipulate that developers provide regular updates through defined performance measures. The creation of performance measures is typically tied to additional incentives or tiered incentive programs for developers. This allows the local government to regularly monitor how effective the incentives are. When the development is not as effective as was promised, the local government can choose to reduce or eliminate further incentives. This method of evaluation minimizes the financial risk to the local government.
Measurement of local employment numbers is another means that local governments have to identify whether or not a tax incentive is actually increasing employment in the local community. The measurement of total jobs must be weighed against the unemployment rate and compared to the same month of the previous year in order to get an accurate picture of the effectiveness of the tax incentive to the corporation that promised the increase in jobs. Local governments can also monitor social media and local employment networks to gain an informal understanding of whether or not the development increased the number of jobs available in the area.
Examining Sales and Tax Revenue
When corporations promise increased sales revenue for a community, local governments can examine whether or not increased economic activity actually took place. This type of evaluation of the effectiveness of tax incentives is most often done when a corporation adds retail space to an area. The local government must look at total sales revenue in order to determine whether more activity took place or whether the consumer spending simply shifted from one group of retailers to the new retailers. Governments can also look at whether or not their share of the tax revenue increased as a result of the tax incentives offered. Income and sales taxes may offset corporate property tax incentives.