I was on this panel - How Do We Assess Tax Expenditures and Ensure Their Effectiveness, along with Jason Sisney with the Legislative Analyst's Office and Darien Shanske of UC Hastings College of Law.
I'll post my written testimony soon, but wanted to post part of it now in hopes of getting comments from readers. One of my suggestions to improve effectiveness was to go through the following six sets of questions.
- Jurisdiction's Goals and Strategy: Have the jurisdiction's economic, societal and environmental goals been identified and articulated? To help determine if the purpose of a tax expenditure is appropriate, it must be judged by how well it helps the jurisdiction meet its goals. Thus, such goals need to be articulated. In addition, answers should be provided as to why the tax expenditure is the necessary and desired way to help achieve the goal and why alternative uses of the funds would not be better.
- Tax System Relevance: (A) Does the tax system hinder the jurisdiction's achievement of the goal such that modification (the addition of special rule) is needed to help the jurisdiction meet its goals? OR (B) Would the tax system be an effective and appropriate vehicle for delivering the benefit? What are the pros and cons of using the tax system to provide the incentive compared to alternative means (such as a grant)?
- Tax Policy Considerations: Principles of tax policy, including equity, simplicity, neutrality and efficiency, minimum tax gap and transparency should be considered in the design of the tax expenditure.
- Budget Considerations: What is the estimated direct and indirect costs of the special tax rule? How long should the tax rule be in effect? How will the cost be controlled (such as setting an aggregate limit for a tax credit)? Will the method of paying for the special rule hinder the ability of the special rule to meet its purpose or cause a greater detriment to the jurisdiction than would occur in absence of the special rule? Could greater benefits be derived for the jurisdiction through other uses of the funds (even if for a different purpose)?
- Accountability Measures: What accountability measures should be included to ensure that the special tax rule is properly used? (See examples of commonly used accountability measures in the next section.)
- Assessment: What data is needed to determine if the special tax rule achieves its purpose? How and when will the data be collected? Should the enacting legislation also specify data collection requirements? Who will monitor collection and who will analyze the data?