States Need to Know Who Benefits From Tax Incentives

Pennsylvania spends hundreds of millions of dollars annually on tax credits designed to expand educational options for the state’s children by helping to defray the cost of attending private schools for students from low- or middle-income households or those who live in areas with poorly performing schools. But because state law prohibits collection of the relevant data, no one knows whether these funds go to the families that most need the help. Furthermore, no one can definitively say whether the children who benefit from these investments achieve better outcomes.

Under these programs, donors contribute money to scholarship organizations—501(c)3 nonprofits approved by the state Department of Community and Economic Development for this purpose—that award the funds to students; the donors then receive a tax credit from the state. Policymakers, however, don’t have the information needed to determine whether the approach works as intended.

This problem of insufficient data isn’t limited to educational tax credits in Pennsylvania or elsewhere. States collectively spend billions of dollars each year on tax incentives—programs designed to achieve a specific objective through the tax code, such as encouraging businesses to create jobs or make investments in a community—but policymakers often do not have the full picture of who these programs benefit.

Lawmakers in Pennsylvania are now aware of these shortcomings. Early last year, analysts from the state’s Independent Fiscal Office (IFO) presented an evaluation of educational tax credits as part of Pennsylvania’s regular incentive evaluation process, which was created by the legislature in 2017.

As part of that process, the state Performance-Based Budget Board plus the chairs of the House and Senate finance committees receive the evaluation reports and hold hearings to discuss the IFO findings. Members agreed that the state needs better data, questioning how lawmakers can hold the program accountable without transparency on how it operates, who benefits from the investments, and whether it improves outcomes for intended beneficiaries. Although policymakers have not yet acted on the findings, the evaluation highlighted a critical gap preventing them from knowing whether the educational tax credits are yielding positive results for students, their families, and the state.

Nebraska works to identify data issues early

In Nebraska, meanwhile, policymakers had been alerted in January 2022 to similar deficiencies in the state’s then-new signature economic development incentive program, the ImagiNE Nebraska Act (ImagiNE). As in Pennsylvania, data gaps could have made it difficult to measure progress toward the goals of the program and whether the business incentives were benefiting the places and people lawmakers intended.

To help them avoid such an outcome, policymakers relied on the expertise of the Legislative Audit Office (LAO), which has been responsible for evaluating the state’s tax incentive programs since 2015. Acting early in the life of the new program, LAO prepared an implementation preaudit to give lawmakers a preview of the data the state would be allowed to collect under the legislation that created ImagiNE, instead of waiting to learn of these deficiencies through a later evaluation.

Thanks to this review, lawmakers learned of important gaps in data on business investment, job creation, real estate, and workforce training that would hinder future evaluations. LAO recommended several changes to improve data collection that would require statutory changes, including requirements for more details on where recruited employees were previously located and what types of training participating employers provided to new workers.

The legislature did not adopt all the recommendations, but lawmakers  made three important changes that, according to LAO, will help to better evaluate ImagiNE’s impact on rural revitalization, developing a skilled workforce, and curbing population loss, especially in rural areas and among young people.

The work of these two state incentive evaluation offices highlights important components of how to measure incentive effectiveness. Pennsylvania policymakers now know that expensive legacy programs can benefit from stronger data collection. Equipped with better data, they could assess whether educational scholarships funded by tax credit programs reach the students they intend to support. The approach in Nebraska, meanwhile, demonstrates that states can take proactive steps to identify and address data deficiencies early in a program’s life so evaluators can give lawmakers in-depth analysis. These states’ experiences make clear that the right data is necessary for accountability and for assessing a key element of program success: whether state investments ultimately benefit the intended businesses, people, and places.

John Hamman works on The Pew Charitable Trusts’ state fiscal policy project.