Tax Expenditures and Transparency

ECONOMIC DEVELOPMENT TAX EXPENDITURES ARE SUBJECT TO LITTLE PUBLIC SCRUTINY

As mentioned above, tax expenditures occur automatically—meaning that they do not require the Legislature to take action for them to remain in effect. When the Legislature and Governor elect to create a new program, or expand an existing one, the funding for these programs must be approved year after year, no matter how dire the need they meet or how popular they may prove with the public. The merits for sustaining the programs are weighed carefully in light of the overall budget priorities and incoming revenue for that year. In contrast, when a new tax expenditure is created, it generally remains in effect year after year—regardless of changing economic or fiscal conditions, or broader consideration of the relevance of the tax expenditure. Thus, tax expenditures can continue without consideration of possible merits, faults, or need.

SHOULD TAX EXPENDITURES FOR ECONOMIC DEVELOPMENT BE SUBJECT TO THE SAME SCRUTINY AS BUDGET APPROPRIATIONS?

Tax expenditures represent a growing share of our economic development resources. These tax expenditures represent a trade-off — for every dollar the state fails to collect due to a tax break, it has one fewer dollar to devote to another priority. Nearly $1.7 billion will be spent on economic development tax expenditures in fiscal year FY 2010 alone. And because most of these tax breaks continue year to year, the cumulative cost over the lifetime of these tax breaks is much greater. As the state budget shrinks, economic development tax expenditures continue to grow at an average of almost 4 percent between FY 2002 and FY 2010.

Consequently, the question must be asked: are these tax expenditures the most effective means of promoting economic growth? The costs and benefits of tax expenditures for economic development must be weighed against the costs and benefits of other strategies for generating economic growth. Especially in the current economic climate, it is imperative that our state adopt a comprehensive and cost-effective strategy for economic development that employs a range of policies, with a clear and transparent mechanism for evaluating these programs.

HOW CAN POLICYMAKERS, RESEARCHERS AND ACTIVE CITIZENS EVALUATE TAX EXPENDITURES?

In order to judge whether or not a tax expenditure is effective, it is important to consider the policy goal of that tax expenditure, the cost and the behavior or actions the tax expenditure has brought about. In addition, the ability to compare the initial estimates of the cost of a tax expenditure to the actual cost would provide important information on cost control and effectiveness. Unfortunately, a great deal of information about tax expenditures is not available to policymakers, researchers or the public -- making informed evaluations of tax expenditures difficult. However, some specific changes to the Tax Expenditure Budget could be made to allow for far more informed discussions of tax expenditure policy:

1. Provide information on the purpose and effectiveness of each tax expenditure. While the Tax Expenditure Budget describes what each tax expenditure is, it does not describe the purpose of each tax expenditure or analyze whether or not the tax expenditure is achieving its stated goal. In order to make a judgment on the effectiveness of this type of tax expenditure, it is important to know why this tax expenditure was created and whether the tax expenditure has had its intended effect. Among other states that do provide this information in their Tax Expenditure Budget, The Delaware Tax Preference Report provides a good example of how this type of information can be presented, at this link..

2. Provide disaggregated information for tax expenditures. In order to gauge the success of most corporate tax expenditure, it is important to know how many firms it applied to, estimate how many jobs were created, and the cost of the tax expenditure per job created. Each year the state spends more than $1 billion on economic development tax expenditures, and yet little information on how this spending has improved the economic climate in Massachusetts is available. Providing information on the corporations that use different tax credits and the number of jobs that the credits create would make it easier to analyze the efficacy of many corporate tax expenditures.

3. Provide tax expenditure information for all sources of tax revenue. The Tax Expenditure Budget only includes information for tax expenditures related to personal income, corporate income and sales taxes. For example, insurance taxes are not included in the Tax Expenditure Budget. This change, while potentially minor, would again provide a more complete picture of where the costs of our tax system are located. The Connecticut Tax Expenditure Budget provides more complete information on other state taxes, providing a more complete picture of tax expenditures in the state.

4. Provide projections for the cost of tax expenditures when they are created and then compare these projections to actual cost in later years. At present, it is difficult to know how the actual cost of tax expenditures compares to the initial projections. By making projected costs for tax expenditures available when they are created, it would be possible in future years to know which tax expenditures had a different cost than initially anticipated.

5. Provide cost estimates for every tax expenditure. In the FY 2009 tax expenditure budget no cost estimates are given for 51 different tax expenditures. In fact, for each of the three major revenue categories, 20 percent or more of tax expenditures have no associated cost estimate. For example, there is a sales tax exemption on various tools used in manufacturing. Up until FY 2004, federal data allowed DOR to calculate the cost of this exemption, which as more than $200 million annually. However, due to a change in federal data collection, DOR no longer provides a cost estimate for this item. In order to get a true sense of the cost of tax expenditures, DOR should be given the capacity and responsibility to collect data that allows a cost estimate to be calculated for each item.

6. Provide information on local tax expenditures. States like New York track the cost of property tax exemptions and other local tax incentives offered by municipalities, often for the purpose of attracting business. The Massachusetts Department of Revenue collects some of this information by town, but does not make it available through the tax expenditure budget. By collecting this information and making it easily available, town residents, researchers and local policymakers can see more clearly the actual cost of local economic development tax initiatives and compare this cost with the value the town has received.