Rhode Island Tax Incentive Evaluations Give Lawmakers Valuable Insights

Rhode Island has released a series of 12 reports this year evaluating the state’s tax incentive programs, providing critical information to guide policymakers. Produced by the state Department of Revenue’s Office of Revenue Analysis (ORA), the reports include detailed background information, data, and analysis of each incentive, as well as policy recommendations.

With the publication of these studies, mandated by the Legislature in 2013, Rhode Island joins an increasing number of states producing evaluations that include insights into the effectiveness of these key economic development tools. Lawmakers then can have more informed conversations and make policy decisions based on data rather than conjecture.

Despite some weaknesses in the data available for the analyses, the ORA reports provide strong economic analysis and can help determine whether an incentive program influences business behavior enough to justify the state investment. To help answer this critical question, the office assessed different scenarios for each incentive’s level of influence. For example, to look at the potential impact of the state’s Motion Picture Production Tax Credit, analysts examined the value to the state if the program influenced behavior in 0, 25, 50, 75, or 100 percent of cases.

Using this approach has provided valuable evidence on the return on investment of several incentives. The motion picture credit evaluation shows that even if the incentive were responsible for 100 percent of participants’ activities, the program’s costs would still outweigh its benefits.

The ORA reports also provide detailed information on how incentives affect the state budget. When possible, the office aggregates information about the number of beneficiaries, the value of credits claimed, taxes paid by employees, and the cost to state agencies of administering the program. The reports also estimate each program’s future cost to the state. For instance, in its evaluation of the Jobs Development Act—a program now closed to new applicants but which continues to generate state liabilities—ORA projected the program could cost the state more than $83 million from 2018 through 2022, although it acknowledged that the exact number was uncertain.

The reports conclude with robust discussions of findings and recommendations for policymakers. In addition to results specific to each program, they also have reached conclusions that apply to multiple incentives. For example:

• ORA has recommended adding statutory expiration dates—or sunsets—to incentive programs that lack them. Such sunsets give lawmakers a chance to reassess how well incentives are working to determine whether they should continue and, if so, in what form.
• Because most incentives lack well-defined goals, ORA has recommended adding statements of purpose to help determine whether incentives are having their intended impact. For instance, the office’s study of a group of incentives for research and development spending found that they were structured in ways that led analysts to conclude that the state intended to benefit small businesses, although this goal is not stated explicitly. In reality, most of the entities that have taken advantage of the program are large corporations.
• ORA also has recommended eliminating several incentives that are not used or are used in such limited ways that they have no meaningful economic or fiscal impact. The Rhode Island Commerce Corp., the state’s economic development agency, has concurred in some instances but has suggested that additional research could determine if there are ways to boost the impact of other little-used incentives.

The revenue analysis office also has proposed ways to strengthen future evaluations, primarily by improving the data available for the reviews. For example, several incentives subject to evaluation are not currently included in the annual “Tax Credit and Incentive Report,” which lists the names of each claimant and the value of the credits they receive. Because the data are not reported publicly, confidentiality rules limit ORA’s ability to fully assess the economic and fiscal impact of these programs. For those incentives that are included in the report, the office has suggested ways to improve the data available, such as revising past year numbers to account for filing extensions, amended filings, or audit findings that changed the amount of credits claimed.

Finally, ORA has proposed changes to tax filing forms to ensure that businesses have clear guidance on the information that must be provided and in what format. For instance, the evaluation of the Motion Picture Production Tax Credit described different ways those that use the credit could reasonably define employees, depending on how part-time workers and vendors are included. Ensuring that businesses use consistent definitions would allow these incentives to be assessed with more certainty.

Despite the data challenges, ORA’s evaluations follow best practices for studying incentive programs. Policymakers should use this information to improve the performance of state incentives, as well as the evaluation process.

Josh Goodman is a senior officer and Alison Wakefield is an associate manager with The Pew Charitable Trusts’ states’ fiscal health initiative.