States Not Following the Money on Business Tax Breaks

Two reports out today add to the evidence that states spend billions of dollars each year on business tax breaks without knowing if they are worth the cost — or do any good at all. As we’ve written, states should pay closer attention to these and other tax breaks, especially during difficult budgetary times like these.

• Most states rarely or never evaluate whether their business tax breaks actually create jobs and expand the economy, according to a report from the Pew Center on the States.  A few states, notably Oregon and Washington, at least occasionally review all major business tax breaks and have begun to build regular assessments into the budget process.  Only a handful of states rigorously evaluate the economic impact of business tax breaks and draw clear conclusions about their effectiveness.
• Sixteen states allow certain businesses to keep some or all of the state income taxes they withhold on behalf of their employees, so that workers’ taxes effectively subsidize their employer, according to a report from Good Jobs First.  These subsidies, typically designed to encourage businesses to create or retain jobs, leave the state with less revenue for schools and other public priorities and encourage a zero-sum competition among states that shifts jobs rather than creating them.  The report didn’t examine whether states have evaluated whether the tradeoff is worth it, but the Pew Center’s findings suggest that it’s unlikely.

As states continue to make tough choices about raising taxes and slashing services ranging from education to public safety, they ought to prioritize these tax breaks alongside other forms of state spending, not leave a large share of the budget off the table.