Policy Research

How to Measure Economic Impact – Evaluating State Tax Incentive

Sarah Leiseca, PEW

Summary

This article mentions three states that have had “produced high quality evaluations of tax incentive programs” and asks specific questions of each to measure the effectiveness of their tax incentive programs. In Minnesota, they ask how much job creation from the incentive would have likely occurred without it. The study concluded that that number is near 79%. In Louisiana, when asking how these incentives affected surrounding industry, they found that most of the created jobs were also displacing existing jobs, leading to a lower net gain than previously reported. Lastly, in Massachusetts the study asked what the trade-offs associated with the incentives were. Here, they showed that the economic cost of funding this program over others resulted in a positive gain of jobs when compared with funding other areas.

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Policy Implications

The main take away is that measuring economic success of tax incentives is not easy. The indicators can be vague, and the benefits may not always appear to outweigh the costs. But the specific questions asked in this article are important for reflection. 1) How much of the economic activity was caused by the incentive, and how much of it would have happened anyway? 2) How did the incentives affect the broader economy, not just the companies that received them? 3) What were the trade-offs associated with paying for the tax incentives? Asking these questions and having expected answers before taking action on an incentive would most likely provide guidance in determining success.