Tennessee

Tax incentive evaluation ratings

Fact Sheet May 3, 2017 Read time:

Projects: Economic Development

Rating: Making progress

Key points:

Tennessee is making progress because the state has adopted a plan for regular evaluation of tax incentives.
The state’s first evaluation under the law, published in December 2016, includes rigorous economic analysis.
One weakness of Tennessee’s law is that it lacks a strong connection between the evaluations and the policymaking process.

Tennessee evaluation law

Year enacted: 2015.^a

Who evaluates: Private consultants.

Length of review cycle: Four years.

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In 2015, Tennessee approved legislation requiring evaluation of the state’s major economic tax credits every four years.^b For the first study under the law, the state contracted with a consulting firm with experience evaluating incentives. The consultants’ evaluation, published in December 2016, included recommendations for improving incentive programs such as a $50 million job creation credit and a $60 million credit to encourage businesses to upgrade machinery.^c

In the study, the consultants analyzed the extent to which the tax credits are influencing business decisions, as opposed to rewarding what companies would have done anyway.^d That type of analysis is a key step for rigorously measuring the economic impact of incentives.

One weakness of Tennessee’s law is that it lacks a strong connection between the evaluations and the policymaking process. The law mandates that the report be delivered to the governor and key lawmakers but lacks a mandate for regular legislative hearings.^e To ensure that evaluation results can be translated into policy, Tennessee can follow the example of other states. In Florida, for example, legislative committees have held frequent hearings on evaluations to discuss the findings and consider what program changes are necessary even without a statutory mandate to do so.^f

Tennessee adopted the evaluation law as part of a significant shift in its approach to economic development. In 2015, the state eliminated many of its business tax credits.^g That move coincided with the expansion of the state’s FastTrack Grant Program, which costs close to $100 million a year.^h Given the significant role that FastTrack and other grants play in the state’s economic development portfolio, analyzing these cash incentives in future evaluations could help ensure that lawmakers possess comprehensive information on the results of the state’s incentives.