A report by the Pew Center on the States says when it comes to responsibly managing tax incentives, Maryland is helping to bring up the rear.
The report, released by Pew last week, says the state is among 25 others that are “trailing behind” in terms of monitoring the cost of tax breaks it uses to attract and retain businesses.
Only 13 states, the study said, are “leading the way.” Researchers found “mixed results” in other states. Maryland is one of 16 states that has not published a report evaluating tax incentives between 2007 and 2011, Pew’s study found.
The report’s authors say states designing tax credits should include reliable fiscal estimates and an annual spending cap.
“States should consistently use these two tools together to ensure that tax credits, exemptions and deductions for economic development are affordable and manageable from day one,” said Jeff Chapman, research manager at the Pew Center on the States. “When policymakers create tax incentives without knowing the expected costs and guarding against economic changes beyond their control, they leave their states vulnerable to budget pressures that are entirely avoidable.”
The Daily Record found last year that of the more than 300 loopholes in the tax code, very few are actually monitored for effectiveness by the state. Some are controlled, however, such as a credit that defrays costs for film and television production in the state. That credit caps annual spending at $7.5 million.
Other Maryland tax loopholes, however, are less well-managed, Pew found.
Researchers highlighted Maryland’s enterprise zones, a commonly-used economic development tool meant to revitalize stressed areas. There are 28 enterprise zones in the state, ranging from the far reaches of Garrett County in Western Maryland, to Baltimore neighborhoods, south to Prince George’s County. Pew found the state has not published a rigorous evaluation of the program.
A spokeswoman for the state Department of Business and Economic Development did not immediately respond to a request for comment.
Some tax credits are being reviewed by state lawmakers. Legislation sponsored by Sen. Richard S. Madaleno and Del. Bill Frick, both Montgomery County Democrats, was approved by the legislature and signed by Gov. Martin O’Malley this summer. The law calls for eight tax credits to be reviewed between July 2014 and July 2017.
The original bill called for 31 tax credits to be reviewed, but Madaleno said at the time that the Department of Legislative Services did not believe it could handle such a hefty workload.
But Chapman said even periodic review of tax breaks was not enough. He cited a 1994 tax exemption passed in Louisiana for natural gas drillers that cost the state just $285,000 in fiscal year 2007. But the discovery of a large natural gas deposit in the state — combined with the expansion of horizontal drilling technology that has coincided with hydraulic fracturing in the northeast — had pushed the price tag to $239 million in fiscal 2010.
Arizona’s Quality Jobs Tax Credit of 2011, California’s Film and Television tax credit of 2009 and Florida’s Manufacturing and Spaceport Investment Incentive of 2010, were all pointed to as examples of how to responsibly cap incentives’ cost.
“Regular evaluations of existing incentives are essential, but not sufficient to prevent the unexpected costs these policies can cause,” Chapman said. “Clear estimates and annual spending limits from the outset are the best approach to avoid unnecessary fiscal risk without sacrificing the economic returns of effective tax incentives.”