Accountability and Tax Incentives

If a company planned to spend a chunk of money on a new advertising campaign, we'd expect that measurable goals would be set. Articulation of the goals would enable the company to determine if the campaign was successful. And we'd expect that data would be collected to enable the company to determine if the goals were met. If not met, the campaign would likely be canceled, or modified and retried.

We rarely see this approach used for tax incentives (special tax credits, deductions or exclusions). Sometimes even the goals are not specifically articulated.  California has done it both ways, usually without the goals specified or data required to be collected.  In 1993, the manufacturing investment credit (MIC) was enacted. The enacting legislation stated that the MIC would expire at some later point if there was not at least a 100,000 increase in manufacturing jobs. In contrast, in 2013, new incentives were enacted (such as the new employment credit) without specific goals set. While a lot of information on the use of these incentives will be made public, no specific goals were stated, so the information cannot be used to see if the incentives were successful.

I notice that a recent report from Maine on a review of its tax expenditures notes this problem - lack of data and useful measures.  Specifically:

"Lack of useful data. The Task Force did not have adequate data to evaluate most tax expenditures. While the biennial MRS tax expenditure report forms an excellent starting point for review of tax expenditures, it does not in many instances contain the kind of information necessary either to evaluate the effectiveness of a tax expenditure or to provide the kind of information necessary to determine the fiscal impact of the repeal or reduction of a particular tax expenditure. Estimates of fiscal impact in the report are frequently based on economic assumptions and modeling rather than specific experience. Identifying and gathering such information is an enormous task which awaits the development of a process for on-going evaluation." (Dec. 2013 report of the Tax Expenditures Review Task Force, page 10)

I believe the business approach for being strategic as to spending should also be used by governments (whether for new direct spending or spending through the tax system). That is, the goals for any incentives should be articulated and data needed to perform the measurements should be required to be collected.  What do you think?

Internet Tax Freedom Act - Missed Opportunity to Help Internet Grow

On 10/31, President Bush signed a bill to extend the Internet tax moratorium for 7 more years (H.R. 3678). Without the extension, the ban would have expired on 11/1/07. The ban is on state and local taxes on Internet access and multiple or discriminatory taxes on e-commerce. It has been around since 1998, originally designed to help the Internet grow.

While lawmakers and the President seem unable to say enough wonderful things about the ban, it has problems. Here are a few:

1. It represents the federal government using the state and local tax base to do something. The federal government could provide incentives to promote broader use of the Internet with its own dollars and should do so. The federal government could provide tax credits to low-income individuals and Internet service providers who offer discounts to low-income customers, and subsidies to libraries and senior centers to improve Internet access.
2. It hurts federal and state/local relations because the federal government is imposing itself on the subnational governments thereby preventing them from being able to fully make their own decisions in crafting their tax systems.
3. It misses opportunities to really help the Internet grow. The ban is very broad even though data exists to show which groups in the population have low Internet usage. A better approach would be to use a TARGETED approach to address the problem. Research shows that broadband use is lowest for people in four groups: low income, age 65 or older, no college education, and rural community dwellers. The extended ban does nothing to help promote Internet use among these groups. If it did, businesses that offer new usages of the Internet would prosper.