The Importance of Evaluating City Tax Incentives

© Lexey Swall/GRAIN

In early November, The Pew Charitable Trusts and the National Conference of State Legislatures (NCSL) hosted a half-day event in Philadelphia focused on the city’s plans to evaluate its economic development tax incentives. The discussion was part of Pew and NCSL’s third annual Evaluators Roundtable, in which state and local staffers from across the country who are responsible for evaluating incentives gather to share their experiences, challenges, and solutions.

Over the past 18 months, Philadelphia has enacted legislation requiring evaluation of business tax incentives and the collection of data from firms receiving them. Select city officials preparing for the evaluations attended the session, which featured a panel including the sponsor of New York City’s evaluation law and experienced evaluators from New York City’s Independent Budget Office and Washington, D.C.’s Office of the Chief Financial Officer. The panelists talked about lessons learned during their jurisdictions’ recent tax incentive reviews.

Several key takeaways emerged from the discussion:

• Incentives should have a clear goal. Determining the ultimate purpose of individual incentives, which is sometimes not immediately apparent, is a prerequisite for any thorough evaluation. Evaluators discussed ways to infer the purpose from the enabling legislation or to seek insight from council members or city officials.
• High-quality evaluations include a mixture of quantitative and qualitative analysis. Evaluations generally offer data on the results of incentives, such as the net impact on the local economy. The studies have also reached valuable conclusions by examining the design of incentive programs and whether they are being administered efficiently.
• Evaluations help inform policy decisions. Once evaluations have been conducted, they can be used in several ways, such as improving existing incentive programs, expanding ones that are working well, merging those found to be overlapping or redundant, or eliminating those that are underutilized or ineffective. Lawmakers can hold hearings on evaluations to consider what changes may be necessary and to hear from stakeholders.
• Evaluators should combine expertise with independence. In New York City, the work is being done by the staff of the city’s nonpartisan fiscal analysis office, while the District of Columbia’s work is being done by the staff of a fiscal office independent from the mayor and the D.C. Council. In Philadelphia, the work will be done by external contractors hired by the commerce director, a mayoral appointee who oversees the city’s economic development efforts. Regardless of organizational structure, the analysts should have an impartial, nonpartisan perspective.
• Evaluations take time and effort. Evaluators often face obstacles to initiating their work, such as locating, obtaining, and organizing the necessary data. As a result, evaluation is often an iterative process. The first evaluations can help identify ways to improve future studies, helping the government build capacity over time.

The panelists underlined that rigorous evaluation is the best way to know whether incentives are achieving their intended goals, how they can be improved, and which strategies will provide the greatest return on the city’s investment.

Josh Goodman is a senior officer with The Pew Charitable Trusts’ states’ fiscal health project, and Thomas Ginsberg is a manager for Pew’s Philadelphia research initiative.