Passing the test … Mississippi’s economic development incentives must now prove their worth

economic development_webThe Pew Charitable Trusts has moved Mississippi to the front of the class among states with effective strategies for evaluating the value of taxpayer-supported incentives for economic development.

Mississippi’s elevation to national leader from Pew’s laggard list just two years ago comes after Gov. Phil Bryant’s signing last week of House Bill 1365, the Economic Development Programs and Tax Incentives Evaluation Act of 2014.  HB1365, which unanimously passed the House and Senate, requires periodic evaluation of the value of tax credits, sale tax rebates and other incentives the Mississippi Development Authority uses to bring businesses into the state, retain other businesses and help ones already here expand.

The bill’s author, Rep. Brad Mayo, said the new law is designed to “ferret out” incentives that are no longer worthwhile or that were not worthwhile in the first place. Further, Mayo said in an interview last month, HB1365 could be a big first step toward modernizing a state tax code he says is littered with incentives for businesses “that maybe were smart at the time but we have gone through evolutions” as businesses and industries change.

Mayo, an Oxford Republican and investment adviser, said he intended his bill to go beyond the high-dollar economic development incentives..

“The standard line of thought is that we’re thinking only of major incentives,” he said. “My reading is that we’re” looking at all “preferential tax benefits used for recruitment and retention of  businesses.

“They may be working. And if they are working, all the better,” Mayo added. “I’m a data man. I want to see the data and go from there.”

Many of the provisions he wants looked at did not come from the MDA or its predecessor agencies, he said.  “They were thought up by legislators,” not professionals in recruiting into the state or keeping them here.

The Pew Charitable Trusts, a national non-profit public policy institute, urged Mississippi to adopt new evaluation standards after the center in spring 2012 released a state-by-state review of methods for assessing the effectiveness of tax incentives for economic development. The review put Mississippi in with more than two dozen other states it described as “trailing behind” other states in the scrutiny given tax incentive packages.

Robert Zahradnik, a principal researcher in that report and director of Pew’s economic development tax incentives work, said the state has taken a big step toward ensuring its taxpayers gain genuine value through awards of public dollars to private businesses. “This legislation stands to make Mississippi a national leader in tax incentives evaluation,” Zahradnik said in an interview shortly after the April 23 signing of Mayo’s legislation.

“Regular evaluations help the state base its economic development strategy on evidence” of what works, he said.

The University Research Center and its economists have analyzed the effectiveness of incentives for specific economic development projects.  Now, the economists will periodically appraise the costs and benefits of individual incentives.

Zahradnik said Pew is especially pleased to see the new law connect the evaluations to the policy making process by requiring annual hearings of a joint panel made up of members of the House Ways & Means Committee and the Senate Finance Committee.

Pew’s 2012 review, conducted by an arm of the organization for formally called the Pew Center for the States, has generated renewed interest among the states for gauging the effectiveness of public-provided business incentives. Rhode Island adopted new evaluation methods last year. Mississippi drew some elements of its new law from the Rhode Island legislation, according to Zahradnik, who called Rhode Island’s law “a starting point” for what Mississippi adopted.

Indiana also drew from Rhode Island in passing a new law in its recent legislative session, he said. Nebraska lawmakers this spring agreed to appoint a task force to recommend new evaluation methods for their state, he added.

Mississippi legislators were prepared to pass a similar law last year but held back until ways could be found to protect proprietary information on businesses the state Department of Revenue would be sharing with state economists.

But getting to that point in 2013 took a multi-year effort. Mississippi tried in the 1990s to measure effectiveness of its spending on business incentives, but those measures have been ignored in recent years, The Associated Press noted in a January 2013 report on new efforts to require more stringent evaluations.

All along, state economists have looked at some of the incentives before they’ve become law, said Bob Neal, a senior state economist. ““We’ve had input into changing the structure of some of the incentives.”

Neal, in an interview last month after legislators approved the new review requirements, sad the  a challenge will be to overcome the problem of determining the value of an individual incentive when packaged with other incentives. “By evaluating individual incentives you are assuming no other incentives were offered at the same time.”

But if two incentives were put in place, one may have provided all the benefits and the other none of the benefits, Neal said.

The job is made even more challenging by the mix-and-match approach Mississippi uses in its incentives packages, a method that gives the MDA flexibility to design incentives for a specific company’s mission and operation, according to Neal.

The economist said he thinks credible assessments can be made, nonetheless.

“Even if it is an imperfect evaluation, it’s still a good idea,” he said.

Zahradnik of the Pew Charitable Trusts said other states have concerns similar to those voiced by Neal. “What we’ve found in our research is that a number of states have found ways to tackle that question,” he said.

A start is to ask by asking specifically what amount of jobs did the new business bring and factoring in a calculation of its effect on a competing business.

It’s also important to evaluate the “offset” of using a state resource such as a tax incentive “and having to cut spending or increase taxes to pay for it. “You have to evaluate how to evaluate the offset of that,” he said.

If the goal is to get the picture of the economic impact, Zahradnik said, the evaluator must look closely at the metrics used in determining the cost per job created. This should give an idea of which incentives are the most cost effective, he said.

In an email follow-up Tuesday, Zahradnik said determining the value of an individual incentive when packaged with other incentives may require the state to find ways to improve data collection and reporting. “Pew has launched the business incentives initiative to develop standards and best practices that Mississippi and other states can use to successfully gather and report data on economic development incentives,” he said.

 

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