Rating: Leading
Key points:
- Indiana is leading other states because it has a well-designed plan to regularly evaluate tax incentives, experience producing quality evaluations that rigorously measure economic impact, and a process for informing policy choices.
- Based on the findings of evaluations, lawmakers have eliminated some incentives that provide a poor return on investment.
- In 2017, the state is scheduled to evaluate the Economic Development for a Growing Economy (EDGE) tax credit, one of the state’s largest incentives.
Indiana evaluation law
Year enacted: 2014.a
Who evaluates: Legislative Services Agency.
Length of review cycle: Five years.
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In spring 2014, Indiana lawmakers approved legislation requiring evaluation of tax incentives on a five-year cycle.b Perhaps no other state has achieved such rapid results from a new evaluation process. By the end of the year, the nonpartisan staff of the Legislative Services Agency (LSA) had completed a rigorous evaluation that showed two small incentives were providing a poor return on investment.c Lawmakers eliminated those incentives in 2015.d Since then, the LSA has continued to produce high-quality studies that are helping to inform policymaker debates over tax incentives—making Indiana a national leader in this area.
Using a mix of common sense and quantitative analysis, the LSA’s researchers have estimated how much taxpayer activity can be attributed to incentives—a key step for measuring their economic impact. For example, they found that a tax deduction saved taxpayers only 2.3 percent on the cost of installing solar-powered roof vents or fans. For a $900 installation project, that would mean a savings of just $21. The small savings were one reason the evaluation determined that the deduction was an “ineffective tool to encourage project spending that would otherwise not occur.” In addition, the evaluation used estimates from academic literature on how responsive consumers are to changes in the cost of energy efficiency projects. The academic research showed the 2.3 percent cost reduction would not significantly affect taxpayer decisions. In 2015, lawmakers eliminated the deduction based on these findings.e
Indiana policymakers have continued to work to improve the evaluation process. Legislation in 2015 provided the LSA with more flexibility to determine what information should be included in the studies and to set the evaluation schedule.f The LSA is using this flexibility to evaluate incentives with similar purposes in the same year—an approach that has helped other states, such as Oregon and Washington, compare the results of programs and ensure that they are coordinated effectively.g
In 2017, the LSA is scheduled to evaluate the EDGE tax credit.h Through this program, the state has committed hundreds of millions of dollars in incentives in recent years.i Given the LSA’s track record, lawmakers should soon have high-quality information on one of the state’s largest incentives.
Endnotes
- Indiana Code Ann. § 2-5-3.2-1, http://iga.in.gov/legislative/laws/2016/ic/titles/002/articles/005/chapters/3.2/#section-1.
- Ibid.
- Indiana Legislative Services Agency, “Indiana Tax Incentive Review” (November 2014), 10–22, https://iga.in.gov/legislative/2014/publications/tax_incentive_review /#document-0b08377d.
- Indiana H.B. 1142 (2015), https://iga.in.gov/legislative/2015/bills/house/1142.
- Indiana Legislative Services Agency, “Indiana Tax Incentive Review,” 19–20.
- Indiana H.B. 1142.
- Heath Holloway (senior fiscal/program analyst, Indiana Legislative Services Agency), interview with The Pew Charitable Trusts, Aug. 18, 2016.
- Indiana Legislative Services Agency, “2016 Indiana Tax Incentive Evaluation,” 5, https://iga.in.gov/legislative/2014/publications/tax_incentive_review /#document-d8c00f1a.
- Legislative Services Agency, to Interim Study Committee on Fiscal Policy, memorandum, Oct. 21, 2015, 6–7, http://iga.in.gov/static-documents/9/9/2/6/992698da/exhibit_914.pdf.