The paper, Benefit or Burden: Evaluating $1 Trillion in State Tax Expenditures, examines the present and predicted effects of such massive tax breaks, which often lack rigorous oversight, and offers scorecards comparing the reporting methods of six states with widely differing policies: Alabama, Minnesota, New Jersey, New York, Utah, and Washington.
To advance important policy goals, such as aiding low-income families or spurring business investment and job creation, states, like the federal government, frequently offer tax incentives to businesses and individuals. Known broadly as tax expenditures, these exemptions, credits, abatements, and other measures reduce state revenues by an estimated $1 trillion a year, almost three times their 2021 total expenditures on education.
Tax expenditures are a less transparent form of spending scarce public resources than appropriations of cash and are often not subject to the same rigorous review. The absence of routine, critical evaluation means that tax breaks can persist unchecked for multiple budget cycles or longer.
In this issue paper, we describe the different types of tax expenditures used by states and how they are disclosed, if at all. To show the wide variations in tax expenditure oversight and disclosure, we offer report cards comparing practices followed by six states with widely differing policies: Alabama, Minnesota, New Jersey, New York, Utah, and Washington. We also offer recommendations for states to improve evaluation and disclosure of tax expenditures:
• Clearly delineate the policy and political reasons for major tax expenditures and consider the cost and reasonable effectiveness of policy alternatives, including direct spending to achieve similar goals;
• Create key performance indicators to evaluate every major tax expenditure to help gauge whether tax policies are satisfying original or amended objectives;
• Set standard sunsetting provisions for every tax expenditure and periodically assess those that relate to mirroring tax expenditures built into the federal tax code;
• Produce a resource allocation budget that reports direct spending and tax expenditure estimates by budget category; and
• Deploy professional staff and administrative resources to analyze and track tax expenditures.
Read the full issue paper
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