Do tax breaks really work?

If it becomes law, House Bill 1020 would require the Commission on State Tax and Financing Policy “to review, analyze and evaluate state and local tax incentives that are provided to encourage economic development or to alter, reward or subsidize a particular action or behavior by a tax incentive recipient,” according to Koch’s office.

Each incentive would be reviewed at least once every five years.

“Right now, after tax breaks are given, we have no way of knowing whether or not they are actually resulting in the benefits expected, such as new investment and job creation,” Koch said in a prepared statement. “This bill will ensure that state and local policymakers have the information necessary to decide whether to continue, modify or repeal economic development incentives based upon real data and independent analysis. We owe it to all taxpayers to ensure that Indiana’s state and local tax incentives are actually achieving the intended results.”

Bang for bucks?

Koch said he has been working on the idea for years. But coincidentally, earlier this month Ball State University released the results of a study questioning the effectiveness of tax abatements.

“Our analysis found that either abatements are leading to higher taxes for other taxpayers within a county or that high existing property tax rates lead to heavier use of property tax abatements,” Michael Hicks, director of the Ball State’s Center for Business and Economic Research, said in reporting the findings. Hicks co-authored the study with Dagney Faulk, CBER’s research director.

“We found that the frequency of use of abatements also tends to lead to higher local property tax rates for existing taxpayers,” Hicks said. “For example, counties employing abatements sparingly and infrequently tend to see lower taxes. Counties offering more generous abatements tend to have higher tax rates for other existing households and businesses.”

Hicks noted that previous research found local tax abatements have been less effective than state-level programs, with about $30,000 in lost local tax revenue required for each new manufacturing job created. The study found local governments granted breaks on $50.78 billion in property value from 2005 through 2012, or about $8.5 billion per year. At a 3 percent property tax rate, that is about $253 million in lost property tax revenue per year, or about $2.75 million per county per year.

The bill

Under Koch’s proposal, the Commission on State Tax and Financing Policy would complete a review of all state and local tax incentives over a five-year period beginning in the 2014 interim. It also requires the Legislative Services Agency to conduct the evaluation and analysis of each incentive scheduled for review by the commission.

According to Koch’s office, the five-year incentive review would cover exemptions, deductions, credits, preferential rates and other tax benefits that:

• Reduce the amount of a tax that would otherwise be due the state;

• Result in a tax refund in excess of any tax due;

• Reduce the amount of property taxes that would otherwise be due to a political subdivision of the state, such as cities and towns. The review would include programs under which political subdivisions dedicate revenue to provide improvements or to retire bonds issued to pay for improvements in an economic or sports development area, a community revitalization area, an enterprise zone or a tax increment financing district.

In a telephone interview, Koch said it’s important for taxpayers, “who are essentially funding the incentives,” to know whether they are working as intended.

“We may find out there are incentives that aren’t even being used,” Koch said.

The bottom line

In the end, the commission’s reports would go to the Indiana General Assembly. Lawmakers, according to the bill, “shall use the commission’s report to determine whether a particular tax incentive:

“ • Is successful;

“ • Is provided at a cost that can be accommodated by the state’s biennial budget; and

“ • Should be continued, amended or repealed.”

Koch characterized the report as a “deep dive” into the questions of tax incentives and their effectiveness.

“It’ll be an important tool for policy-makers at both the state and local level,” he said.