Should Economic Incentives Be Evaluated?
THE SHORT ANSWER: YES, BUT . . .
This week on the Senate floor, a member recited two familiar – but no less remarkable – facts: In 2000, South Carolina ranked 38th in the nation in per capita income. In 2012, we’d fallen to 48th.
All, unfortunately, true. But the conclusions drawn from this and similar statistics almost always involve new spending items or government programs. Certainly that was true in this case. There is, however, another conclusion to be drawn. It’s this: incentives haven’t worked.
While South Carolinians’ income has remained largely static in comparison to the rest of the nation, we’ve doled out more and more tax incentives to specific companies and industries in the name of “economic development.” Indeed, from 2000 to 2009 (years for which the Bureau of Economic Advisors, or BEA, provides data), corporate and individual tax incentives for economic development grew from $70.3 million to $261.2 million. Tax incentives have continued to grow since 2009, while at the same time the size of special sales tax exemptions has been staggering.
In 2010 (the latest year on which the state Department of Revenue provides data), South Carolina gave out $469.4 million in individual income tax credits, $67.8 in job development or retaining credits, and $143 million in corporate income tax credits – not counting the $1.5 billion in corporate income tax credits that were carried over from previous years. And according to the latest data from the BEA, during the current fiscal year the state will hand out a massive $3 billion in sales tax exemptions.
Aside from the many transparency issues raised by the practice of “incentivizing” companies and industries, there would appear to be very little evidence that they are effective. Heightening skepticism about their value is the fact that public officials themselves seem to have no way of measuring the success or failure of incentives – a truth revealed many times over by The Nerve and, more recently, the Associated Press.
A bill currently in the legislature would address this last problem. H.4875 – the “Economic Development Tax Incentive Evaluation Act” – would require the Department of Revenue to compete a study every four years to assess the impact, including both the economic benefits and the financial cost, of economic development tax incentives. Included in the reports would be the baseline assessment of the incentive, statutory goals of the incentive, the number of companies it’s granted to, a cost-benefit comparison of the revenue foregone, the tax revenue generated, the estimated number of jobs created as a direct result, and more.
The bill seems like a good idea. But studies undertaken by state agencies almost always show the program under review in a positive light. And even when government-driven studies do show substantial flaws in the status-quo, lawmakers tend to ignore them. (A Department of Commerce study recently concluded that the state’s tax system is uncompetitive and outdate – it’s now gathering dust. The findings of Gov. Haley’s ethics study commission have been largely ignored. And years of studies and commissions showing that South Carolina’s government structure blurs accountability lines and obliterates the separation of powers produced nothing but this year’s weak gesture at reform.)
While tax credits ought to be evaluated in some way, the real changes need to be on the front end. Until incentives are open to the public from the very beginning, and until companies receiving incentives are required to apply for them and account for promised results, we can expect to keep doling out millions in tax favors to well-connected companies with no real ability to verify their effectiveness.