Making state tax incentives more predictable.

• Position: News & Numbers

Every state uses tax credits and other incentives to encourage business growth and job creation. The costs of these programs often increase quickly and unexpectedly, resulting in major budget challenges. Reducing Budget Risks, a new study from Pew Research Center, identifies strategies--which are effective for both state and local governments--to help ensure that incentives are effective and free of surprises.

The cost of specific tax incentive programs often increases quickly and unexpectedly, and sometimes by large amounts of money. The result is a difficult choice between raising taxes and cutting spending to keep budgets balanced.

Yet these problems are not inevitable. To understand both the sources of the difficulties and potential solutions, Pew reviewed numerous state documents and news articles and conducted phone interviews with more than 40 government officials and experts from 20 states. Based on this research, the report recommends two strategies for governments to employ so that they can use incentives while avoiding budgetary surprises.

Strategy I: Gather and share high-quality data on the costs of tax incentives. Governments often don't realize until after budget problems emerge that the costs of incentives are increasing quickly, the report notes. If they had more warning, policymakers could either prepare for the cost increases or prevent them by changing the design of the incentives. To combat this, jurisdictions can:

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