What About the Taxes We Don’t Collect

April 17^th is Tax Day, for the IRS and many states, including Vermont. So we should expect stories about who pays, how much, and what we get for our taxes. But here’s something from the other side of the coin: The Pew Center on the States’ new study on the taxes people and businesses are not paying, thanks to tax incentives and other giveaways.

Unlike some other tax credit studies, “Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth” doesn’t examine the merits or effectiveness of these tax expenditures, which all states offer. Instead, it asks what states are doing to evaluate their own programs to determine whether they’re achieving their goals and making the best use of the public funds they’re not collecting.

Vermont is among the 25 states that are—as the Pew Center politely puts it—“trailing behind.” In other words, Vermont is doing a poor job assessing its tax incentive programs. A state report (see page 177) issued more than a year ago also concludes that the state isn’t keeping very good track of the effects of its economic development programs more broadly.

Pew found that 13 states were “leading the way” in evaluating their incentive programs. In some cases, those evaluations showed that the incentives were producing the desired results. In other cases, the assessments showed that programs were more expensive than people had projected, or that the money could have been better spent on other priorities.

The study offers criteria that should be included in any objective assessment of tax incentive programs. These include establishing clear, measurable goals, and examining the economic impacts of incentives, and making sure such evaluations are part of any budget policy deliberation.

Measuring the economic impact deserves special attention. It points out the importance of analyzing the potential negative effects of incentives. For example, if a company gets a job-creation tax break and hires employees away from other existing companies, the program hasn’t created any net new jobs. Another consideration: Do the benefits stay in the state? Do all of the Vermont Economic Growth Incentive (VEGI) jobs go to Vermonters, or are some being filled by residents of New Hampshire, Massachusetts or New York? Finally, any economic impact analysis should take into account the lost opportunity costs—that is, what else the state might be doing with the money lost to the tax credits.

Starting with the Challenges for Change program a couple of years ago, both the administration and the Legislature have endorsed the idea of performance measures and greater transparency to give Vermonters a better idea of how effectively their tax dollars are being spent. Montpelier needs to give the same consideration to the money we’re not collecting, thanks to tax incentives.