How Well Do DC’s Tax Incentives Work? Wouldn’t It Be Great to Know?
The District uses tax incentives to address a wide range of goals, from encouraging grocery stores to locate in underserved areas to incentivizing college savings. There is a widespread belief that tax incentives are an efficient way to meet these goals. Yet, no one is responsible for checking back later to see if the adopted tax incentives actually work.
That may soon change. Councilmember Mary Cheh (D-Ward 3) introduced legislation earlier this month to establish a process for regularly reviewing tax incentives. The bill would address a significant gap in fiscal oversight in DC, and it would add to other steps taken in recent years to make more informed decisions about tax incentives.
The bill was inspired by a study from the Pew Center on the States, which found that DC and many states “have not taken basic steps to produce and connect policy makers with good evidence of whether [tax incentives] deliver a strong return on taxpayer dollars.” The District and 25 states were deemed to be “trailing behind” by Pew because they are not meeting any of the standards suggested for sound oversight of tax incentives.
The bill before the DC Council, the Tax Transparency and Effectiveness Act, would require all “tax expenditures” to be reviewed once every five years. Tax expenditures are government programs paid through the tax code. Like a tax credit to help families pay for child care or a tax break for companies that locate in targeted geographical areas, tax expenditures provide selective tax preferences to businesses or residents to meet certain purposes.
The proposed tax incentive review process for DC is similar to one adopted in Washington state. If the DC bill becomes law, all tax expenditures would be reviewed every five years to assess how well they are meeting their intended purpose. For economic development tax incentives, the review would examine the extent to which the observed economic outcomes – such as business growth or new jobs – would have likely happened without the tax incentive. The bill calls for the reviewers to make recommendations for improving DC’s tax expenditures.
This would make the District a leader in assessing its tax incentive programs. And it would complement efforts adopted in recent years to improve oversight over economic development incentives, including a requirement adopted in 2011 requiring a financial review of all proposed tax abatements before they can be voted on by the DC Council.
The DC Fiscal Policy Institute supports the goals of the Tax Transparency and Effectiveness Act. Tax expenditures tend to be forgotten once they are adopted, becoming embedded in the tax code and taken for granted, even if they are not effective or outlive their usefulness. Greater transparency over the District’s tax expenditures will undoubtedly lead to more informed decisions and better tax incentive programs. We look forward to a hearing on the bill soon.