Evaluating Tax Credits

Tax credits are in the public eye more and more these days, promoted as the way to get state economies back on track and grow jobs. Yet too often credits are not evaluated to see if they deliver on their promise.  Previously I blogged about a series of reports on tax credit evaluation from Good Jobs First.  Now the Pew Center on the States has released a report titled Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth. 

Pew used four criteria to evaluate how well states evaluate tax credits:

• Are the evaluation results built into policy and budget deliberations?
• Are all major tax incentives evaluated regularly?
• Does the evaluation ask and answer the right questions using good data and analysis?
• Does the evaluation draw clear conclusions about the tax credit?

So, how does Maryland fare?  Not well.  Pew found that Maryland failed to meet any of the four criteria for good tax credit oversight.  Maryland thus fell into the category of states trailing behind national trends in evaluating tax credits. 

The General Assembly moved in the right direction this session by passing two bills improving oversight of tax credits.  The Tax Credit Evaluation Act (SB 739/HB 764) establishes a periodic review process for some tax credits, which sets a precedent for evaluating other tax credits in the future.  Senate Bill 1086 (HB 1456) requires taxpayers claiming certain business tax credits to do so electronically, thus making oversight and data analysis easier for the Comptroller's office and others.  MBTPI supported both bills, and both now await the Governor's signature.

The Week Ahead

Last week the Senate passed its version of the budget, including progressive and moderate revenue measures that protect the state from more painful cuts.  This week budget action moves to the House.

Monday, March 19^th

• Senate Budget and Taxation Committee holds a hearing on the Tax Credit Evaluation Act (SB 739/HB 764), which MBTPI supports.   The committee will also hold hearings on a number of tax credits and other bills.  2pm in the Senate Office Building.
• House Ways and Means Committee holds a hearing on the State and Local Revenue and Financing Act of 2012 (SB 523).  2pm in the House Office Building.
• House Appropriations Committee will hold a hearing on the Budget Reconciliation and Financing Act (SB 152).  3pm in the House Office Building.

Tuesday, March 20^th

• Senate Judicial Proceedings Committee holds a hearing on SB 966, which would prohibit discrimination on the basis of employment status.  One of the distinctive features of the Great Recession and its aftereffects is that the number of long-term unemployed has risen dramatically.  The situation is further exacerbated because some employers now refuse to consider applicants unless they are already employed.  SB 966 would prohibit that practice in Maryland.  1pm in the Senate Office Building.

Wednesday, March 21^st

• House debates the Operating Budget (2nd Reading, subject to change).
• Senate Finance Committee holds a hearing on SB 778, which would increase regulation of rent-to-own businesses. MBTPI supports this bill.  1pm in the Senate Office Building.

Thursday, March 22^nd

• House debates the Operating Budget (3rd Reading, subject to change).

DBED audit highlights need for tax credit accountability

A legislative audit has found serious problems with programs managed by the Maryland Department of Business and Economic Development (DBED).  The audit found that:

• DBED did not require eight companies applying for the One Maryland tax credit to document costs that serve as the basis for the amount of credit awarded.  Total tax credits awarded equaled $34 million.
• DBED investment agreements contain provisions to force repayment plus interest if companies leave Maryland within five years of the state investment.  Yet DBED failed to follow up when the recipient of a $250,000 investment in 2008 left the state one year later.  The audit estimated that the amount owed the state now totals $325,000.  After the legislative audit raised the issue DBED sent the company a letter demanding repayment.
• Internal users of DBEDs financing programs tracking systems were not adequately restricted.  Some DBED employees had access to many actions, such as bill initiation and payment processing, which were outside the scope of their responsibilities.  Disturbingly some former employees still had access up to 20 months after they left DBED.  The department corrected security permissions once they were brought to its attention.
• DBED did not collect required expenditure and performance reports from all grantees.  Consequently, the state does not know if the funds were used for their intended purposes.  Grantees may well be in compliance with the terms of their grants, but DBED has no way of knowing in many cases.

Encouragingly, DBED’s response to the audit (included as an appendix to the report) was generally positive.  They agreed with the auditors findings and, as noted above, took immediate action in several cases. 

MBTPI supports the Tax Credit Evaluation Act (SB 739/HB 764), because Marylanders deserve to know what they are getting for their tax dollars.  Unfortunately, this audit highlights the need for continued oversight to make sure that existing and new regulations are properly followed.

What does Maryland get for its tax credits?

That’s the question Senator Richard S. Madaleno Jr. and Delegate Bill Frick want the General Assembly to ask.  On Tuesday, Senator Madaleno introduced the Tax Credit Evaluation Act, and Delegate Frick will introduce the House version shortly.

The legislature examines normal expenditures every year through the budget process. Tax credits—sometimes called tax expenditures because they cost the state money in terms of lost revenue—are seldom revisited once established.  Yet there are more than 300 tax credits available in Maryland.  I blogged about this issue previously in December (Money for Something?) and January (Maryland subsidy programs score B- in national study). 

The Tax Credit Evaluation Act (SB 739) would require the President of the Senate and Speaker of the House to appoint a committee to review most tax credits every five years on a rotating schedule.  Each tax credit would be evaluated based on five criteria:

1. the purpose for which it was established,
2. whether that purpose is still valid,
3. whether the credit is meeting its objectives,
4. whether the intentions of the credit could be better met through alternative mechanisms,
5. and the administrative and lost revenue costs to the state.

The committee’s final report to the General Assembly would recommend specific action on the tax credit (renew, modify, allow to expire), as well as any legislation needed to accomplish the recommendations.  Without affirmative action by the legislature, the tax credit would then expire.

The bill covers tax credits that the Institute supports, like the Earned Income Tax Credit, not just credits that benefit specific businesses and industries. We believe that these credits will withstand fair scrutiny, and that regular reviews will only result in their expansion and improvement.

The Tax Credit Evaluation Act would establish a review process for tax credits that is sorely needed in Maryland.  This is doubly true at a time when revenue shortfalls threaten vital services.  The principles of good governance and due diligence with the people’s money make this a no-brainer.  MBTPI supported this bill last year, and we support it again this year.

Maryland subsidy programs score B- in national study

Maryland is fourth in the nation when it comes to enforcement mechanisms for economic development projects that fail to meet their performance objectives, according to a report out today from Good Jobs First (GJF).  However, there is still work to be done as Maryland only achieved a B- grade.  This new report comes a month after GJF ranked Maryland fifth in terms of subsidy performance and job quality standards.

Subsidy enforcement mechanisms are a timely topic in Maryland, as several programs have been in the news recently.  Officials with the Department of Business and Economic Development (DBED) testified yesterday in front of the Senate Budget and Taxation Committee about two programs, InvestMaryland, and the Job Creation Tax Credit, which are intended to spur innovation and job growth.  On Monday, Lieutenant Governor Brown highlighted a proposal that will be in Governor O’Malley’s budget released later today; Health Enterprise Zones (HEZ’s).  Similar to Maryland Enterprise Zones, HEZ’s would provide financial incentives to doctors and clinics that set up shop in areas with poor health outcomes (usually poor rural or urban areas).  The House Ways and Means Committee may also revisit the Tax Credit Evaluation Act, which would require tax credits to undergo a cost-benefit review every five years.  The bill died in the Senate last year.

Narrowing the health outcome gap is a laudable goal, as are job creation and spurring innovation.  However, as the GJF reports highlight, accountability standards and enforcement mechanisms are key to the success of any subsidy program.  DBED is rolling out a database that is a step in the right direction, and passing the Tax Credit Evaluation Act would be another.  Maryland should continue to improve its subsidy programs, to the benefit of all Marylanders